Are I bonds a good investment? (2024)

Amid decades-high inflation, Americans rushed to buy one of the safest and, until recently, sleepiest types of investments:I bonds. Back in October, investors who were keen to lock in a guaranteed six-month rate of return of 9.6% bought nearly $7 billion worth of Series I bonds, an all-time record.

I bonds are a type of savings bond issued by the U.S. government that can protect investors from inflation. That’s because the interest rate these bonds pay resets twice each year, and is based on the current rate of inflation. As inflation topped 9% in late 2022, I bond interest rates also rose — along with demand among investors.

A lot can change in a matter of months, however. The Federal Reserve’s aggressive strategy to curb inflation by raising a benchmark interest rate has worked, which has resulted in lower I bond rates and higher interest rates for other types of investments.

In fact, I bond rates recently readjusted to 4.3%, down from the prior 6.89% rate and that may make these investments lose further appeal. “They were a lot more attractive six to 12 months ago than they are now,” notes Alec Quaid, a Denver-based certified financial planner at American Portfolios. In light of the new rate of return, he says many investors are likely better off opening a high-yield savings account or a certificate of deposit (CD).

Here’s what to consider if you’re considering buying I bonds now.

What are I bonds?

Series I bonds are a type of U.S. savings bond designed to protect investors against inflation. These bonds pay a variable interest rate that resets twice each year, based on the rate of inflation as measured by the consumer price index for all consumers (CPI-U). Even though the rate varies for I bonds, it’s still a guaranteed return, which can help balance out risk in your portfolio due to volatility in the stock market.

I bonds are issued by the U.S. Department of the Treasury. When you lend money to the government, you do so in exchange for the promise of being repaid with inflation. Because the government has never defaulted on its debt, even during past recessions, I bonds are considered to be a very safe investment.

How do I bonds work?

I bonds have some quirks that investors need to know about before buying, because that may decrease their attractiveness — particularly now that they’re paying a lower rate of return.

Figuring out all the ins-and-outs of buying I bonds and then keeping track of this investment in a separate account can be off-putting to some investors, Quaid notes. “In general, I’m a big fan of simplifying finances,” he says. “Minimizing the number of places you have money at, for me, is a huge consideration when I talk to clients about I bonds.”

How much can you earn from I bonds in 2023

The amount of interest you can earn from I bonds will vary, depending on when you purchased them. Even though a new composite rate is announced each May and November, your composite rate of return may be different — and again it depends on when you first purchased and what the fixed rate was at that time.

If you bought an I bond in January, the composite rate was 6.89% — a fixed rate of 0.4% and a semi-annual inflation rate of 3.24%. During a six-month period, you could have earned $34.45 on every $1,000 I bond investment, for a total value of $1,034.45 after six months.

For these I bond holders, the composite rate is 3.79% for the second half of the year — the fixed rate of 0.4% still holds, while the semi-annual inflation rate has fallen to 1.69%. Based on the new value of your I bond value ($1,034.45), you will earn $19.60 on this investment in the latter six months of the year.

Given these rates, your I bond will be worth $1,054.05 at the end of the year.

How to buy I bonds

You can only buy I bonds directly from the U.S. government, either in an electronic or paper format, and these investments aren’t available for purchase from online brokers. You can purchase up to a total of $15,000 in I bonds each calendar year — $10,000 in electronic bonds and $5,00 in paper bonds.

To buy I bonds online, you must create an account with TreasuryDirect and provide some basic personal information. Meanwhile, you can only buy paper I bonds using your IRS federal tax refund, and only if you’re due a refund and don’t owe taxes.

Pros and cons of I bonds

It’s important to consider whether tying up your money is worthwhile — especially because you can’t access your money for the first year and you’ll lose three months of interest if you cash in before the five-year mark. What’s more, the “risk” inherent to I bonds is the rate of return will adjust, as it recently did, says Danny Rozansky, a principal and managing director at Robertson Stephens, a San Francisco-based wealth manager.

“You need to be constantly looking forward and not backward on the rates these once were paying,” Rozansky says.

Now that inflation is cooling, a high-yield savings account or a CD (and the best banks and best online banks) may provide a similarly attractive interest rate — with more flexibility to access your money, Quaid adds. “I bonds have made an awesome headline, in my opinion, because they have paid really good rates,” he says. “That’s shifting now.”

Still, if you want to weigh the pros and cons for yourself, consider the following:

Pros:

Cons:

Are I bonds a good investment?

When weighing the pros and cons of I bonds, it’s as important to consider whether they are a good investment for you and how they’ll help you to achieve your broader goals, Rozansky says. W “Look at your entire portfolio to determine how much money you should put into these.”

While some investors rushed to take advantage of high interest rates in 2022, I bonds have lost much of their appeal now that the composite rate has fallen — whilst interest rates on other types of accounts have risen. In fact, investors can snag a higher return and more flexibility by opening a high-yield savings account or CD, Quaid notes. The hassle of buying I bonds alone may not make them attractive, and especially because a $10,000 investment won’t be a substantial piece of your financial picture in the long-run, he adds.

In addition to considering how I bonds might fit into your financial puzzle, it’s also important to consider the bigger picture at stake. “If I bonds have a high return, that means inflation is up and that’s not good for the overall market and economy,” Rozansky notes.

The bottom line

As inflation was heating up in 2021 and 2022, I bonds became “the next flashy thing” that garnered attention among investors. Now that inflation has cooled, so too has interest in I bonds. In fact, the total value of I bonds purchased in April was less than 4% the record in October.

While I bonds may still hold some appeal for certain investors, those people who missed out on the period of high interest rates for these securities are probably better off saving that money in other types of accounts now.

Investing FAQs

What’s the difference between a traditional IRA and a roth IRA?

IRAs are retirement savings accounts that hold investments you choose — anything from stocks and bonds to ETFs and real estate. As tax-advantaged accounts, they're designed to help you grow your nest egg faster. The two main types of IRAs — traditional and Roth — differ primarily in when and how you pay taxes. But there are other differences to consider, including rules about contributions, withdrawals, and required minimum distributions (RMDs). Read our full breakdown of traditional IRA vs Roth IRA to learn more.

How long do I have to rollover my 401(k) after leaving a job?

A 401(k) rollover involves moving the money from your workplace retirement plan into a different tax-advantaged retirement account. You can roll the money into a traditional individual retirement account (IRA) or your new employer’s 401(k) plan without paying taxes. If you receive a direct distribution from your employer’s retirement plan, you’ll have 60 days to deposit the money into a new retirement account without penalty.

I bonds or CDs - which is better?

I bonds are U.S. Treasury securities with a rate of return that is adjusted twice a year to reflect the inflation rate. When choosing between I bonds vs. CDs it’s important to note that both will be safe savings vehicles, but they differ in key ways. I bonds come in smaller denominations and have a fluctuating interest rate. CDs require a larger minimum investment and have a fixed interest rate. Both tie up money for a period of time, and both are backed by the U.S. government.

Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.

This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as Financial and Home Services Editor for the Hearst E-Commerce team. Email her at lauren.williamson@hearst.com.