Series I Savings Bonds rates fell from historic levels this month. The Labor Department released Consumer Price Index (CPI-U) data last month that showed prices rising by 8.2% for the 12 months ending Marcy 2022 and 2.34% over the past six months. As a result, the Inflation Rate on I Bonds fell to 6.48 in November 2022 (the rate was 9.62% annualized). While a significant drop, it still represents one of the best rates you can find on any risk-free investment. And, Treasury announced a Fixed Rate on I Bonds of 0.40%.
How I Bond Rates Are Set
Two factors determine the interest rate on an I bond: A Fixed Rate and an Inflation Rate. Combining these two rates gives us what is known as the Composite Rate.
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The Fixed Rate is set based on the date of purchase. Today the Fixed Rate is 0.40%. The Fixed Rate was above 3% in the late 1990s and early 2000s. It’s been at 0% for much of the past decade until now.
The Treasury announces the Fixed Rate on I bonds every six months, on the first business day of May and November. The Fixed Rate is an annual rate that compounds every six months. The big question is whether the Treasury will increase the fixed rate more next year.
Unlike the Fixed Rate, the Inflation Rate changes every six months over the life of an I bond. The rate is set based on changes in the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy. As with the Fixed Rate, the Inflation Rate is set on the first business day in May and November.
Keep in mind that the date new rates apply to a specific I bond depends on the month in which you bought it. Here’s a table of when new rates will take effect:
|Issue month of your bond||New rates take effect|
|January||January 1 and July 1|
|February||February 1 and August 1|
|March||March 1 and September 1|
|April||April 1 and October 1|
|May||May 1 and November 1|
|June||June 1 and December 1|
|July||July 1 and January 1|
|August||August 1 and February 1|
|September||September 1 and March 1|
|October||October 1 and April 1|
|November||November 1 and May 1|
|December||December 1 and June 1|
The Composite Rate is the annualized rate based on adding the Fixed Rate to the Inflation Rate. Through April 2023, Composite Rate is 6.89%.
How I Bonds Work
There are several features of I bonds to keep in mind before investing.
First, you can only buy I bonds directly from the Treasury. They are not bought and sold on the secondary market. This means, among other things, that you won’t find I bonds in an ETF or mutual fund portfolio.
Second, the government imposes a limit on the amount of money that you can invest in I bonds each year. You can invest $10,000 a year per social security number through Treasury Direct. You can also purchase up to $5,000 through your federal tax refund.
Third, you must keep your investment in an I bond for at least one year. You can’t sell the bond back to the government during this time. If you sell before holding the bond for five years, you also lose three months of interest.
Fourth, if you own a business, the business entity can also invest in I bonds. This is something I just learned. My business will be buying $10,000 in I bonds this month.
Finally, you can defer paying income tax on interest until you sell the bond. In addition, you’ll owe no state income tax.
I Bonds vs CDs
Given the current and upcoming yields on I bonds, they are significantly better than even the best CD rates. That’s true even if one plans to sell the I bond after one year and incur the 3-month interest penalty. The key difference is that with I bonds, you cannot liquidate for the first year. With a CD, you can always withdraw your money, subject to an interest penalty.
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