Interest rates on these bonds will remain pretty high until May.
A few months ago, I bonds started getting a lot of attention when interest rates reached a record 9.62%. But that rate expired back in November, leaving many to wonder whether investing in I bonds still made sense for them. Below, we’ll take a look at what you can expect from I bonds as we move into 2023.
What are I bonds?
For those who aren’t familiar, I bonds, also known as Series I savings bonds, are a type of federally backed government bond with an interest rate that’s tied to the inflation rate. This makes them a popular investment when inflation is high, as it has been this year.
I bonds interest rates have two parts: the fixed rate and the inflation rate. The fixed rate is locked in for as long as you hold the bond, but the Bureau of the Fiscal Service updates the inflation rate every May and November based on changes to the Consumer Price Index for All Urban Consumers (CPI-U). The combination of the fixed and inflation rates is known as the composite rate.
How much can you earn with I bonds in 2023?
How much you earn with I bonds depends on several factors, including how long you hold the bond and the bond’s composite interest rate. For bonds issued between Nov. 1, 2022 and April 30, 2023, the composite rate is 6.89% for the first six months. That’s down quite a bit from the 9.62% high, but you could still walk away with quite a bit in interest.
If you invested $1,000 in an I bond right now, you’d earn $34.45 in interest over the next six months. And if you invested $10,000, you’d make close to $350 during that time. That’s a pretty generous return, but it’s not the full story.
It’s impossible to predict how much you’ll earn during the next six months because the government won’t announce these rates until May 2023. They could go up, which means you’d earn even more in interest. But it’s more likely that interest rates will decrease as the rate of inflation continues to slow down. And if that happens, you’ll earn less interest in your next six months of I bond ownership.
You might think of cashing out your I bonds after six months to avoid a rate drop, but this won’t work. You’re not allowed to cash in your I bonds until you’ve held them for at least one year, and if you cash them in before you’ve held them for at least five years, you’ll pay a penalty of three months of lost interest.
Are I bonds a good investment for you?
I bonds can make good short-term investments, but you should feel comfortable holding them for at least one year and ideally, five years before cashing them in. They can be a good fit for seniors who want to earn interest on their savings while also keeping their nest egg safe. Younger investors who are saving for the long term can probably do better by keeping their savings in stocks.
If you choose to invest in I bonds, you should know that you’ll still pay federal taxes on the interest you earn from these bonds. However, there’s an educational tax exclusion, which enables some I bond owners to avoid taxes on their I bond interest. In order to claim this exemption, you must meet the following requirements:
- You spend money on qualifying higher education expenses for yourself, your spouse, or your dependents.
- You cash in your I bonds in the same year you claim this tax exclusion.
- You have a tax-filing status other than married filing separately.
- You are 24 or older when you purchase the I bonds.
- Your modified adjusted gross income (MAGI) is less than the cut-off amount the IRS sets in the year you want to claim the exclusion. This can change over time.
How do you purchase I bonds?
There are two ways to purchase I bonds. You can purchase paper I bonds by mail only when filing your federal tax return. You may purchase a minimum of $50 and a maximum of $5,000 of these in a single year.
But most people opt for electronic I bonds, which you can purchase online from TreasuryDirect. The minimum purchase of these is $25 and the annual maximum is $10,000. If you choose to purchase paper and electronic I bonds together, you can buy a maximum of $15,000 per year.
Once you’ve purchased your I bonds, you must hold them for at least one year and then you can cash them in whenever you’d like. If you choose not to cash them in, they’ll continue to earn interest for up to 30 years.
Only you can decide if I bonds are a smart investment for you right now, but even if they’re not a good fit, they’re something to keep an eye on for the future. They can give you some peace of mind when inflation is running high, as long as you can spare the cash for at least a year.
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