How long should you hold I bonds? (2024)

How long should you hold I bonds?

You can cash in (redeem) your I bond

You'll likely want to time your cash-out for three months after your I-Bond's reset date so that the three months' interest you lose are of the new lower rate, not the higher rate you were happier with. To accomplish that, you should hold your I-Bond for at least 15 months.

I bonds earn interest for as long as 30 years, and while their interest rates may change, their redemption value will not.

So if you are a longer-term investor, it may be worthwhile to redeem your old I Bond and re-purchase a new one to lock in the higher fixed rate. Shorter term investors should think about cashing in their I Bond at the 12 or 15-month mark.

Cons of Buying I Bonds

I bonds are meant for longer-term investors. If you don't hold on to your I bond for a full year, you will not receive any interest. You must create an account at TreasuryDirect to buy I bonds; they cannot be purchased through your custodian, online investment account, or local bank.

Series EE savings bonds issued May 2024 through October 2024 will earn an annual fixed rate of 2.70% and Series I savings bonds will earn a composite rate of 4.28%, a portion of which is indexed to inflation every six months.

Yes, you can purchase up to $10,000 in electronic I bonds each calendar year. You can also buy an additional $5,000 in paper I bonds using your federal tax return.

Dividend stocks can offer you a payout and the potential for appreciation over time, making them a more attractive long-term investment than Series I bonds. However, they come with more volatility and without a government guarantee that you'll get your principal back.

I bonds have earned their reputation as an inflation-fighting tool for retirees. As of May 2024, I bonds are returning 4.28%, which is lower than the same period in 2023 but still well ahead of the inflation rate of 3.5%.

After 20 years, it doubled in value ($1,000) and continued to earn interest ($600) until reaching maturity after 30 years. If you redeem your bond today, you can redeem it for $1,600 and spend that on goods or services or reinvest that money in a new savings bond.

Do I pay taxes on I bonds?

Interest earned on I bonds is exempt from state and local tax but subject to federal tax. The interest is taxed in the year the bond is redeemed or reaches maturity, whichever comes first.

Electronic I bonds can be cashed online through TreasuryDirect.gov. Paper I bonds can be cashed online, or they may be accepted by some banks. If you hold an I bond for less than five years, you'll lose three months' interest.

You can cash an I bond after 1 year of ownership, but there's an early redemption penalty: If you cash out before 5 years, you forfeit the last 3 months of interest earned. Taxes: Interest earned on I bonds is subject to federal income tax, but not state or local taxes.

“With I bonds, your principal is protected and safe. However, if you cash the bond out before five years, then you will lose up to the last three months of accrued interest. So you can't lose what you put in, but you can lose earned interest,” Boxenbaum said.

Depending on the inflation rate, I-bonds can offer returns that are significantly higher than those of other low-risk investments like certificates of deposit (CDs) or high-yield savings accounts. I-bonds are also attractive because investors bear almost no risk of losing their principal.

EE Bond and I Bond Differences

The interest rate on EE bonds is fixed for at least the first 20 years, while I bonds offer rates that are adjusted twice a year to protect from inflation. EE bonds offer a guaranteed return that doubles your investment if held for 20 years. There is no guaranteed return with I bonds.

The optimal time to purchase I bonds is when inflation rates are high, which leads to greater returns. But the decision should align with your overall investment strategy and financial goals.

You can cash in (redeem) your I bond after 12 months. However, if you cash in the bond in less than 5 years, you lose the last 3 months of interest. For example, if you cash in the bond after 18 months, you get the first 15 months of interest.

For the near-term, T-bills are going to offer better yields than I Bonds. Short-term investors should favor T-bills if their investing horizon is 2 years or less.

How often is I bond interest paid?

I bonds earn interest from the first day of the month you buy them. Twice a year, we add all the interest the bond earned in the previous 6 months to the main (principal) value of the bond. That gives the bond a new value (old value + interest earned).

You can cash in an I bond after a year, but if you withdraw sooner than five years, you'll pay a penalty of the last three months' interest. Because your rate changes every six months, it's smart to withdraw when your penalty will be based on a lower rate—and avoid cashing out when you'd be forfeiting a high rate.

After weighing your timeline, tolerance to risk and goals, you'll likely know whether CDs or bonds are right for you. CDs are usually best for investors looking for a safe, shorter-term investment. Bonds are typically longer, higher-risk investments that deliver greater returns and a predictable income.

I bonds, with their inflation-adjusted return, safeguard the investor's purchasing power during periods of high inflation. On the other hand, EE Bonds offer predictable returns with a fixed-interest rate and a guaranteed doubling of value if held for 20 years.

Securities purchased through TreasuryDirect cannot be sold in the secondary market before they mature. This lack of liquidity could be a disadvantage for investors who may need to access their investment capital before the securities' maturity.