Series I Bonds – Cash Out or Hold?
It was good while it lasted. Series I Bonds are looking average now that inflation has come down. That is a great thing for the US as it looks like we might have defeated inflation. Not so good for Series I Bond holders who were enjoying high yields with very little risk.
This will be the fourth entry in the last two years on this topic. Hopefully the last. If I need to post about Series I Bonds again, it’ll most likely mean that inflation is higher again.
The timeline of our Series I Bond journey:
November 2021 –
It was a good idea to pick up Series I Bonds because inflation was roaring. Yields at the time were 7.12% and inflation was anticipated to pick up, meaning the yield was expected to increase.
The key here was inflation was high and the Fed was late with hiking rates, which left little to no safe alternatives to park cash. Investors couldn’t get enough of the Series I Bonds, it was common for us to hear that the cap of $10,000/year was too low.
May 2022 –
The yield of 9.62% on these bonds peaked with inflation. At the time we knew inflation wasn’t a forever thing but 9.62% is very compelling. Other risk-free rates were ~3% at the time so it made sense to continue to buy (or hold) Series I Bonds.
November 2022 –
Decisions need to be made where yields dropped to 6.89% and it was getting to a point whether buying more of these was not quite the value they once were compared to other safe savings vehicles. Yields for CDs were ~5% but they were much easier to buy than the Series I Bonds, plus there was no $10,000 limit to buying the CDs.
February 2024 (Today) –
Rates on Series I bonds are 5.27% which is in line with money market and CD rates. Given that it’s much easier to buy (and sell) money market funds and CDs, it doesn’t make as much sense to pick up more Series I Bonds. However, if inflation were to reignite these bonds would make good hedges against inflation. If inflation continues its downtrend, we could see these rates go materially below other alternatives.
What should you do?
It probably doesn’t make sense to buy more Series I Bonds for the reasons stated above. We’ve been saying inflation has peaked during the summer of 2022 and have been right so far.
If you’re a holder of Series I Bonds, cashing out could make sense given that the penalty for holders of less than 5 years is 3 months’ worth of interest. If cashing out with today’s rates, the penalty would be 5.27% divided by 4, or 1.31%.
Keeping these bonds could make sense as well. Inflation is noisy and any increase would therefore increase the yield on the Series I Bond. This could help offset any pain caused by higher inflation.
How to sell electronic Series I Bonds
Log in to your TreasuryDirect account: Go to https://www.treasurydirect.gov/.
Navigate to "ManageDirect": This should be readily available after logging in.
Select "Cash a Bond": Choose the Series I bond you wish to cash.
Review the details and confirm: Double-check the amount you're cashing and other information before finalizing.
Funds deposited: The proceeds will be deposited directly into your linked bank account within a few business days.
Paper Series I Bonds:
Two options: You can cash paper I bonds either through your bank or by mail directly to the Treasury Department.
Cashing at your bank: Check with your bank if they offer this service. Most major banks can cash paper savings bonds. Bring a valid ID and the completed redemption form (FS 3723).
Cashing by mail: Complete the redemption form (FS 3723) and mail it along with the bond to the address provided on the form. You can find the form and instructions on the TreasuryDirect website:
Important reminders:
You can cash an I bond after 1 year of ownership, but there's an early redemption penalty: If you cash out before 5 years, you forfeit the last 3 months of interest earned.
Taxes: Interest earned on I bonds is subject to federal income tax, but not state or local taxes.
Additional resources:
TreasuryDirect Help Center: https://treasurydirect.gov/savings-bonds/i-bonds/i-bonds-interest-rates/
Cashing EE or I savings bonds: https://www.treasurydirect.gov/indiv/help/treasurydirect-help/how-do-i/
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