Series I Savings Bonds (commonly referred to as “I Bonds”), issued by the U.S. Government through Treasury Direct, are a popular investment choice for many individuals looking to secure their savings against inflation while enjoying a government-backed guarantee.
We have written blogs about I Bonds in the past and you can read them here and here if you need a refresher. Treasury Direct provides the information.
For November 2024, the composite interest rate is 3.11% consisting of a 1.20% fixed rate and a 0.95% semiannual inflation component. That rate is higher than it appears because interest is not subject to State taxes, while Federal taxes are not due until the bond is redeemed. Details on how the rate is calculated and other information can be found here.
Recent History of Series I Bonds Rates
Series I Bonds became incredibly popular in 2022 amidst decades-high inflation in the US. The number of Treasury Direct accounts exploded as people realized you could earn almost 10% on a Government guaranteed bond, although that rate only applies for six months.
The table below shows the fixed rate, inflation adjustment, and composite rates for the last three years of Series I Bonds. For a longer history of rates, click here.
As US interest rates have remained high but year-over-year inflation has come down, the fixed rates on new issue Series I Bonds have increased while the inflation adjustment has declined.
The 3.11% composite rate for the November ’24 issue is the lowest since the Nov ’20 issue. The 1.20% fixed rate in the most recent issue and the 1.30% fixed rate in the prior two issues are the highest fixed rates since 2007.
Compared to prior issue Bonds with lower fixed rates, these will always pay more when the inflation adjustment is reset.
Series I Bonds bought between May and October ’22 paid 9.62% interest, entirely driven by the inflation adjustment. However, since the inflation component resets every six months and the fixed rate was 0% for that issue, those Bonds currently pay just 1.90%.
What To Do Now?
Advantages of Series I Bonds include:
- An inflation adjustment component.
- Interest is exempt from state and local taxes
- Federal taxes on interest are not due until the bonds are sold, which could be as long as 30 years in the future.
- Guaranteed by the Federal Government in any amount.
Disadvantages of I Bonds include:
- Must be purchased through a Treasury Direct account, an initially more complicated process than depositing funds into a bank account.
- Once funds are used to purchase an I Bond, the funds are unavailable for 12 months. After 12 months, that bond may be redeemed at any time.
- There is a $10,000 per person per year limit on I Bond purchases.
- I Bonds cannot be purchased in an IRA (nor would you want to because of the tax advantages mentioned above).
- If you redeem a bond within five years of purchasing it, you lose three months of interest.
Discuss with your financial advisor whether you should buy, continue holding, or redeem your Series I Bonds.
Considerations include: the period in which you bought your I Bonds; expected holding period; need for liquidity; marginal tax rate; and other factors. We are happy to discuss any of these considerations with our clients.
Disclaimers:
This is for educational purposes only. To learn more about the topics mentioned and if they are suitable for you, consult an appropriate professional. Tax laws can change at any time.
Any information provided in this presentation has been prepared from sources believed to be reliable but is not guaranteed and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for information purposes only and does not constitute a recommendation.
Arthur Stein and Arthur Stein Financial, LLC are not authorized to give legal or tax advice. For information on your specific situation, please consult your tax advisor regarding any tax implications and your attorney for legal implications. As required by the US Treasury Regulations, you should be aware that this presentation is not intended to be used and it cannot be used for the purposes of avoiding penalties under federal tax laws.
Keep in mind that:
Past performance is no guarantee of future performance;
Investments involve the risk of loss of principal and earnings; ETFs, mutual funds, money market funds, etc. are not guaranteed by the US Government, the FDIC, a bank or anyone else.
“Average annual return” evens out variations in the actual year-to-year returns. ETFs, mutual funds and individual stocks and bonds fluctuate in value and there will always be times when they lose value.
None of the information provided is necessarily relevant to anyone’s personal situation. Circumstances differ among individuals and you should not assume that these generalizations or information apply to you.
Investments mentioned may not be suitable for all investors.
An investment cannot be made directly into an index.