TreasuryDirect announced that I Bonds bought between May and October 2023 will have a 0.9% fixed rate plus a variable rate that changes every six months. This new fixed rate is the highest we’ve ever seen in 15 years.
Low Fixed Rate on Older I Bonds
If you bought I Bonds between May 2020 and October 2022, the fixed rate on those older I Bonds is 0%. This 0% fixed rate stays with the bonds for their entire life up to 30 years. If you cash out the older I Bonds to buy new ones, you will benefit from the higher fixed rate over the long run.
I Bonds bought between November 2022 and April 2023 are still in the 12-month mandatory holding period by October 2023. They can’t be switched to new bonds until their mandatory holding period is over.
You see a list of your existing I Bonds by clicking on Current Holdings after you log in to your TreasuryDirect account. Then you choose Series I Savings Bond and click on Submit.
Here’s a reminder of the fixed rate on existing I Bonds issued since November 2010:
|Issue Month||Fixed Rate|
|11/2022 – 04/2023||0.4%|
|05/2020 – 10/2022||0.0%|
|11/2019 – 04/2020||0.2%|
|11/2018 – 10/2019||0.5%|
|05/2018 – 10/2018||0.3%|
|11/2017 – 04/2018||0.1%|
|11/2016 – 10/2017||0.0%|
|11/2015 – 10/2016||0.1%|
|11/2014 – 10/2015||0.0%|
|05/2014 – 10/2014||0.1%|
|11/2013 – 04/2014||0.2%|
|11/2010 – 10/2013||0.0%|
Look up the fixed rate for your existing I Bonds from the table above. If the fixed rate is 0%, 0.1%, 0.2%, or 0.3%, they’re all good candidates for switching to new ones.
Early Withdrawal Penalty
You’ll pay an early withdrawal penalty when you cash out I Bonds within five years but you can minimize the penalty if you time it correctly.
The early withdrawal penalty is the interest earned in the last three months before you cash out the bond. The variable rate will drop to a relatively low 3.38% annual rate in the coming months. If you wait three months after the bonds start earning 3.38%, you only give up three months’ worth of interest at 3.38% per year, which comes out to about 0.85%. You’ll make up for it in about a year from a higher fixed rate when you hold the new I Bonds for the long term.
I Bonds issued in the following months can be cashed out on these dates to keep the penalty low:
|Issue Month||After 3 months at 3.38% Variable Rate|
|January or July||10/1/2023|
|May or November||8/1/2023|
|June or December||9/1/2023|
It’s a little tricky for I Bonds issued in these other months:
|Issue Month||After 3 months at 3.38% Variable Rate|
|February or August||11/1/2023|
|March or September||12/1/2023|
|April or October||1/1/2024|
The 3-month period at the 3.38% annual rate doesn’t end until after November 1, 2023, but we don’t know whether the fixed rate will drop by that time. If the fixed rate doesn’t drop, you can cash out on the dates in the table above and get new I Bonds. If you worry that the fixed rate might drop after November 1, 2023, cashing out in October 2023 to get new I Bonds will give up a part of the interest at the 6.48% annual rate as opposed to 3.38%.
If you have spare cash, you can buy new I Bonds first in October and wait a few months to cash out your older I Bonds on the dates in the table above. This way you keep the early withdrawal penalty low while locking in the 0.9% fixed rate in case the fixed rate drops after November 1, 2023.
Example: Suppose you bought I Bonds in February 2022. These bonds have a 0% fixed rate. They will finish earning the 6.48% rate on August 1, 2023. You have three options:
Option A – Cash out on November 1 as the table shows to buy new bonds. The 3-month early withdrawal penalty will be entirely at the 3.38% annual rate. You minimize the early withdrawal penalty but you run the risk of getting a lower fixed rate on the new bonds for up to 30 years. This is a good option only if you’re confident that the fixed rate won’t drop and it may increase.
Option B – Cash out on October 1 to buy new bonds in October. The early withdrawal penalty will be two months at the 3.38% rate and one month at the 6.48% rate. You lock in the 0.9% fixed rate but your early withdrawal penalty is a little higher than Option A.
Option C – Use other cash to buy new I Bonds in October. Cash out existing I Bonds on November 1 as the table shows and replace the other cash. This gives you the best of both worlds but you need some spare cash to bridge the gap.
Take a look at the issue month of your older I Bonds. Set a calendar reminder to cash them out on the corresponding dates.
New 12-Month Holding Period
The new I Bonds you buy will have a new 12-month holding period. It’s not a problem when you hold them for the long term.
If there’s a chance that you’ll need the money from I Bonds in 12 months, don’t switch. You won’t make up for the early withdrawal penalty anyway if you hold the new bonds only for another year.
Pay Tax on Accrued Interest
You will pay federal income tax on the interest earned when you cash out I Bonds unless you chose to pay tax annually. See I Bonds Tax Treatment During Your Lifetime and After You Die.
The interest is exempt from state and local taxes. The 3-month early withdrawal penalty doesn’t count as interest earned because you never received it. You won’t pay tax on the early withdrawal penalty.
TreasuryDirect won’t withhold taxes when you cash out I Bonds. You will add the interest to your tax return using the 1099 form from TreasuryDirect.
Remember to download or print the 1099 form from TreasuryDirect in January. It’s under ManageDirect -> Manage My Taxes.
TreasuryDirect sends an email notification when the 1099 form is available but they won’t send the form by mail. Set a calendar reminder for yourself to download the 1099 form on January 31 in case you miss the email notification or the email notification is mistakenly directed to the spam folder.
Annual Purchase Limit
Buying new I Bonds after cashing out older I Bonds still counts toward your annual purchase limit. If you already bought I Bonds in 2023 or if you have more than $10,000 worth of I Bonds at 0%, you can’t switch all of them to new ones by buying new bonds directly but you can still buy them as gifts and hold them for delivery in the future.
Buying I Bonds doesn’t count toward the annual limit of the purchaser. It counts toward the annual limit of the recipient in the year when the gift is delivered to the recipient.
This works especially well for married couples. You can cash out all your old 0% fixed rate I Bonds, buy new ones as gifts to your spouse, and hold the gifts for delivery in the future. The new bonds start earning the 0.9% fixed rate right away while they’re being held in the gift box. Then you deliver the gifts in $10,000 chunks to your spouse in the coming years. Your spouse can do the same in the opposite direction.
See Buy I Bonds as a Gift: What Works and What Doesn’t and Deliver I Bonds Bought as a Gift in TreasuryDirect for more details on how this works.
The 15-year high fixed rate represents a great opportunity to lock into a higher fixed rate for many years to come. If you plan to hold I Bonds for the long term, see which bonds you should switch over, when is the best time to cash out, and whether you should buy new bonds directly or via gifts.
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I know I bonds are longer term investment, but I wonder if it would be better to buy t bills for the time being instead of reinvesting in I bonds
Harry Sit says
It’s impossible to say over a short time frame. By definition, any small difference for only a few months doesn’t matter much anyway. The more important thing is to lock in a good rate above inflation for many years to come. If you cash out some May bonds on August 1 and you want to stay in Treasury Bills for a couple of months until late October, that’s fine. You risk losing the good fixed rate if you go beyond November 1.
Markie C. says
I don’t have to worry about any of this when I just invest in a Federal MMF. Maybe avoid some State taxes, too. Bond investing shouldn’t be this complicated.
Harry Sit says
The point of buying I Bonds is to get inflation protection. A Federal Money Market fund pays more than the new composite rate on I Bonds at the moment but it doesn’t offer inflation protection. Of course not everyone values inflation protection to the same degree and we don’t have to choose only one or the other either. I have money in a money market fund too.
Government Agency Bonds as alternative to I-Bonds?
I have maxed out Ibond purchase this year. I bought iBond last February @7.1% so I will sell those bonds later this year unless the inflation picks up and the fix rate stays high.
I am considering buying FFCB bonds instead. Most are callable. A few bonds with 10 year maturity YTW is 4.105% so it is not bad. Any thoughts on that?
BTW, those numbers are quoted on Schwab, which I find has better quotes than Fidelity
Did you consider that when you sell ibonds you “give up” an allocation that you can’t get back. So, if your goal is to build as large an ibond allocation as you can then I don’t think the math on selling any of them makes sense, since there is a limit on how much ibonds you can buy each year based on your situation.
In other words what I am saying is if you have plenty of money available to buy ibonds and ibond gifts then just do that at whatever time you think is best and leave your existing money alone because you can’t get it back in there.
If money is tight then sure selling some to free up funds for better ibond rates “may” make sense.
Great work you are doing! Still read what you have to say always and just sent your book to my boy to learn from.
I’m also curious about the pros and cons of adding more if you have funds available than to repurchasing.
Harry Sit says
Dave – Thank you for the compliments. My goal isn’t to build as large an I Bond allocation as I can. It’s to get the best inflation protection, which can come from both I Bonds and TIPS. A unique feature of I Bonds is their flexibility. The holding period can be anywhere from one year to 30 years. However, I don’t need infinite flexibility. After I have enough in I Bonds for flexibility, the rest can go to TIPS for better inflation protection.
Lorraine & Harry,
The pros and cons seem pretty simple, but buried in that are choices of what you think is the best inflation protection for you.
“Pro” for not selling is simply if you don’t have your total allocation you want in ibonds (direct, including gift box) then you shouldn’t sell you should just buy whatever you need without selling. Harry, you said you aren’t there yet, so the risk is you might make the wrong choice now replacing some ibonds when you don’t need to, while taking longer to get a full ibond allocation. In other words, the money that is slated to fill the rest of the ibond allocation can’t be added until a later date so it’s return may be inferior to the ibonds you sell.
“Pro” to sell (Con to not selling) is just the opposite of the above, you have all the ibonds you need, or you have better uses for the money, so you sell some and either replace them with better rates or use the money for something else. Knowing that you will have to pay tax on any gains and may lose 3 months of interest.
Harry, I know you like TIPS and I have read your articles on why, I just don’t like the speculation involved, since I consider TIPS part regular bond and part ibond. In other words you aren’t getting 100% inflation protection like you do with ibonds. In 2008 or so, many people lost 8% or so of their money in a “safe” Vanguard TIP by not understanding the duration of the bond they owned. I know you understand that but – “just saying.” They are not as safe as ibonds, during their lifetime. If you plan on holding them to the endpoint then you will get what you paid for. Ibonds can be sold at anytime after 5 years with no loss to their inflation protection.
One other pro to not selling is the 5-year holding period, which of course takes “5-years” to replace, or 4,3,2,1 years to replace depending on the age of the ibond you sell and want to replace.
It’s fairly straightforward without too many shenanigans for a single person to buy $25,000 a year in I Bonds through a sole proprietorship and tax refund, and couples can use the gift box strategy. I am choosing to cash out five year plus old bonds now, starting with the 0% bonds but am waffling on the 0.1%, 0.2%, 0.3% bonds as I think the fixed rate can easily go back to that level.
Thank you for this article, Harry. It helped me firm up my plan.
I’ve bought but haven’t yet sold I bonds. Can you sell and immediately buy again within treasury direct, without have to transfer the money elsewhere?
Harry Sit says
You can enter two separate transactions on the same day but you’re better off transferring through your bank. Because I Bonds pay interest monthly, it’s better to cash out on the first of the month and purchase on the second last business day of the month. Money staying in your bank account earns some interest during that month, which further reduces the impact of the early withdrawal penalty.
I’m wondering what the “breakeven” fixed rate would be considering taxes.
Assuming a 15% Capital gains tax rate + 3.8% NIIT tax and holding Ibonds at least 5 years (when one finally decides to cash out), my back of the envelope math would require a 1.0% fixed rate to come out slightly ahead after taxes and inflation. Do you think this is in the ballpark?
Thanks for your posts – J
Harry Sit says
Interest from I Bonds is taxed as interest, not capital gains. Paying 25% tax on a 1% fixed rate plus 3% inflation adjustment puts you back at 3%, which matches inflation. A 33% tax rate and 3% inflation will require a 1.5% fixed rate to match inflation after taxes. We may not come out ahead of inflation after paying taxes but we don’t have a better alternative.
If someone has already bought $10,000 worth of i-bonds this year, they can’t cash out older i-bonds (with lower rates) and buy another $10,000 worth in the same year, right?
Harry Sit says
That’s right. They can still use the gifting strategy in the Annual Purchase Limit section — buy a gift in October and deliver the gift in January.
Christian Walenta says
what is the timing for the 3 month penalty when the ibonds were purchased mid month? do i need to sell based on the purchase date or the issue date, ie first of the month?
Harry Sit says
The issue date.
My wife and I maxed out our 2023 I Bond limit when we delivered 0% fixed rate Gift I Bonds from last year to each other in March. We then purchased another round of Gift I Bonds in April to lock in the 6.89% composite rate (with 0.4% fixed rate).
We plan to delay any redemption decision for the delivered I Bonds with 0% fixed rate until after the October CPI report and before Halloween. At that point, we won’t know the new November 1 fixed rate, but we will know the new November 1 inflation rate. If it comes in lower than 3.38%, we will wait until three months after that new lower rate apples to our 0% I Bonds which pushes redemption into early 2024. This will not only lower the penalty, but delay the tax payment on the interest until April 2025 which is another benefit of delaying redemption. If the inflation rate comes in higher than 3.38%, we will likely just hold onto those I Bonds.
Either way, we will probably buy a second round of Gift I Bonds in that October period to capture the 0.9% fixed rate for the long term. I have a T-Bill maturing in October for this purpose. There isn’t as much of a concern about loading up on Gift I Bonds and staggering deliveries multiple years ahead when there’s a fixed rate attached which provides the rationale to hold long term.
Thanks for the article. I bought $10,000 in I Bonds for both me and my wife in 2014, 2016, 2019 and 2022. I didn’t use a gift to buy them for my wife – I just logged into her TreasuryDirect account and bought them. I hadn’t heard of the “gift box” option until recently. It seems like you are suggesting that we cash out all those I Bonds and immediately buy our allocations for this year, then use the gift box option to repurchase, as gifts to each other, the rest of the $60,000 I Bonds that were cashed out, plus purchase whatever else we can purchase with otherwise unneeded cash. Then we would “deliver” $10,000 to each other each year in the future for at least the next six years, plus as many additional years to be able to deliver the remainder in the gift box within the $10,000-per-year/person limit. Also, we will need to pay federal taxes for the cashout.
Is my understanding correct? If so, do you think that this approach will always or nearly always have more benefits than potential costs, like from payment of the cashout taxes? And I guess I have to ask — since my marriage has had some significant ups and downs, is this option perhaps too risky/complex for my situation? if something happens to my marriage, is it possible to ungift these gifts, or change the gift recipient?
Harry Sit says
It’s not possible to ungift or change the gift recipient after you buy the gift. It’ll be reciprocal both ways but if you’d like to avoid complexity, maybe gifting isn’t a good path for you.
In addition, cashing out and repurchasing works the best for people who got into I Bonds in the last two years. Taxes aren’t too bad because the bonds haven’t earned that much interest yet. The bonds won’t have to stay in the gift box for too long when you only repurchase $10,000 or $20,000. Older bonds bought as far back as 2014 and 2016 have accumulated more interest. Getting locked up in the gift box for six years reduces liquidity.
Interesting and timely article for many of us that got into iBonds in that 0% window and I’d never really noticed the rate drop on older bonds until you pointed it out. One question is how iBonds are taxed. In particular does iBond interest count towards NIIT?
Harry Sit says
They’re taxed as interest income, which counts toward the Net Investment Income Tax, but they’re exempt from state or local taxes.