Did You Know? Earn 7.12% on Savings bonds
The U.S. Treasury’s Inflation bonds (I bonds) will earn a rate of 7.12%, which is the second-highest initial rate ever offered on I Bonds. The new rate applies to new I bonds purchased from November until April and applies to older I bonds that may be paying a ‘base rate’.
The rate earned on I bonds consists of a base rate, which is fixed for the life of the bond, and rate that varies based on inflation and which can reset every six months. The fixed and variable rates together comprise an I bonds “composite rate”.
The fixed rate on some older I bonds is as high as 3.6%, meaning that holders of those bonds will be earning 10%+ from now until April.
The fixed rate on I bonds is currently zero and has been for awhile, which means that all interest earned on new I bonds come from the variable rate and, if the inflation rate falls, then the rate paid on newly issued I bonds could become less attractive, or even fall to zero (you will get your principal back). The variable rate will be reset in May for the next six months and will depend on the rate of inflation (as measured by the Consumer Price Index).
I bonds pay interest for 30 years unless you redeem them earlier. You can purchase digital (instead of paper) I bonds through Treasury Direct where you can redeem them as well and have the money deposited back to your bank account. You don’t pay state or local income taxes on the interest earned and you can wait until you redeem an I bond to pay any federal income tax. You can also qualify to exclude income tax on some of the interest if you redeem an I bond and use the proceeds for qualified higher education expenses (within certain earnings limits).
You can buy as little as $25.00 and up to $10,000 in digital I bonds per year, per person. You can also use $5,000 of your federal tax refund to buy paper I bonds. For a couple filing jointly, this means you can buy up to $25,000 per year ($10,000 each plus $5,000 via tax refund). And you can always buy more for others as gifts.
For any new purchases, think about I bonds as an alternative to a one-year CD because you must hold an I bond for at least 12 months before redeeming it. We do not recommend using any cash that you could possibly need within a year to purchase I bonds. Also, if you redeem the I bond before five years, then you’ll owe penalty of (or basically forfeit) the prior three months interest. So if you redeem an I bond having owned it for 18 months, then you’ll only receive interest for 15 months. In the current environment with bank deposits and CDs earning very little, and even considering giving up three months worth of interest in the future, I bonds are an option to consider for those who find themselves with some extra cash they won’t need for a least a year.
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