Series I Bonds: Is it time for an exit strategy?

When it comes to inflation and our financial lives, inflation receding is a good thing. Over the past 18 months, the Federal Reserve has aggressively raised interest rates in a focused effort to tap the breaks on post-pandemic inflation, and they’re beginning to see some results. As of July, the US consumer price index, the primary measure of inflation, was down to just 3.2 percent. This is good news for your high-yield savings accounts and certificates of deposit, but bad news for inflation-adjusted Series I savings bonds.

What’s the Deal with Series I Bonds?

Looking back to the fall 2021, just as we were turning the corner on COVID lockdowns, inflation soared to record highs which drove Series I Bond interest rates to 7.12% on November 1st, 2021. Suddenly, for the first time in more than a decade, Series I Bonds sparked our curiosity, especially in comparison to our savings accounts which were paying a meager 0.01%. Then on May 1st, 2022, the Treasury Department set the new Series I Bond inflation-based interest rate at 9.62% prompting even more of us to purchase our $10,000 per year allowance of these inflation-based bonds.

Now that inflation is finally ticking down, Series I Bonds interest rates are suddenly less compelling. Because Series I Bonds pay interest based on a fixed rate plus an inflation-adjusted rate, we find ourselves at a crossroads between lower interest rates on I Bonds and higher interest rates on other short-term savings vehicles.

The Fed’s actions to raise interest rates have dramatically increased mortgage and auto loan rates while having the secondary effect of increasing the rates that some banks pay on personal savings accounts. This is especially true of some high-yield savings accounts, money market accounts, and certificates of deposit.

Now that the balance has shifted to favor these short-term savings rates, it may be a good time to trade those Series I Bonds in favor of a high-yield savings (HYS) account, certificate of deposit (CD), or a money market account. A quick check of today’s yields shows HYS accounts paying over 4% and 12-month CDs over 5%.

Series I Bonds Rules of Engagement

As we consider a Series I Bonds exit strategy, it’s important to remember some of the basic “rules of engagement” associated with these bonds:

The stated interest rate includes 2 rates: a fixed rate for the life of the bond and an inflation-based rate that adjusts every 6 months (May 1st and November 1st) based on current inflation.
Your interest rate resets to the current interest rate every 6 months based on the date you purchased the bond.
There is a minimum term of 12 months with a holding period of 5 – 30 years. If you sell a Series I Bond after 12 months but before meeting the 5-year holding period, you incur a 3-month interest rate penalty.
Interest is credited to your account at the end of each month.
The interest earned is tax deferred until the year you sell the Series I Bonds.

Series I Bond Example

Here’s an example to help illustrate how your interest rate might adjust every six months:

On February 3rd, 2022, you purchased $10,000 in Series I Bonds when the current rate was 7.12%, your interest rate reset on the following dates:

2/3/2022 7.12%

8/3/2022 9.62%

2/3/2023 6.48%

8/3/2023 3.38%.

In this example, as of August 2023, you’ve met the absolute minimum holding period of 12 months and your interest rate recently reset to 3.38%. Suddenly, your Series I Bond is earning a lower annual percentage rate than a high-yield savings account or the current CD Rate.

With this shift between inflation and interest rates, it may be time to consider selling your Series I Bonds and moving the funds to a higher-yielding investment like a HYS account or CD.

What About the 3 Month Interest Penalty?

In the example above, you have not met the 5-year holding period, meaning you’re subject to a 3-month interest rate penalty. If you sold your Series I Bonds in August 2023, you would forfeit the interest earned in the three previous months which was credited at the 6.48% annual rate. To avoid forfeiting interest earned at this higher rate, you want to wait until the beginning of the fourth month at the new lower rate.

HUH?? I know, still confusing. If you’re going to pay an interest penalty, you want to pay it at a lower rate. Back to our example: if you wait until at least December 1st to sell the Series I Bonds, you forfeit your September, October, and November interest earned at 3.38% instead of the higher 6.48%.

Because everyone’s purchase dates, timelines, tax rates, and motivations are different, it’s difficult to nail down the perfect strategy for everyone. The best we can do is provide a general guideline for the earliest you might consider selling your Series I Bonds. It is also important to remember that this strategy to optimize your short-term savings rate requires that you follow through and reinvest the cash from your Series I Bond in a higher interest-bearing savings option. If you sell your Series I Bonds and then let the cash sit in your non-interest-bearing checking account, you’ll miss out on the additional interest you could earn in a CD, money market or high-yield savings account.

Finally, this is a good opportunity to remember that selling your Series I Bonds is a taxable event; you will receive a Form 1099-INT from the IRS reflecting the interest earned over the holding period. Earned interest is taxed at your regular income tax rate.

The table below reflects the earliest date you should consider selling Series I Bonds purchased between November 2021 and October 2022. Series I Bonds purchased beginning November 2022 carry a fixed interest rate of 0.4% and bonds purchased beginning May 2023 carry a fixed rate of 0.9% in addition to the fluctuating inflation rate. This fixed rate provides an additional bonus on top of the inflation rate for the 30-year life of the bond making the decision of when to sell them even more complicated and beyond the scope of this discussion.

For now, let’s focus on the Series I Bonds you might consider selling as part of a strategy to achieve a higher rate of return.

Month Purchased	Earliest Date to Consider Selling
2021
November	August 2023
December	September 2023
2022
January	October 2023
February	November 2023
March	December 2023
April	January 2024
May	August 2023
June	September 2023
July	October 2023
August	November 2023
September	December 2023
October	January 2024

To learn more about Series I Bonds, visit Treasury Direct.gov.

As always, personal finance is by definition – personal. Your unique financial situation determines the appropriate financial decisions for your personal financial success. This information is provided for educational purposes and is not intended to represent an individual investment recommendation. If you’d like to talk to one of our military financial advisors, you can find them here.