Selling Your I Bonds in 2024?

The latest announced I Bond semi-annual inflation rate was 1.48%, falling considerably from 3.24% in November 2022 and 4.81% in May 2022. These numbers are determined from CPI-U, so the news isn't all bad if you're worried about inflation.^[1] What it does mean for sure is that I Bonds previously yielding above 9% APY a year ago are now considerably below that. The specifics of the falling rate depend on when you bought the bond — see calculator at the end of the article.

Unlike the inflation rate portion of the Series I bond rate, the fixed rate is more or less totally up to the discretion of the Fed. In what secret smoke-filled backroom these decisions get made in we can only guess.^[2] The May 2024-Nov 2024 fixed rate is 1.30%, which is as high as it's been for any I Bond issued since Steve Jobs unveiled the iPhone in 2007.

However, if you look at the full history of the fixed rate, you'll see that it's been much higher in the past.

Above: Fixed Rate of US Treasury Series I Bond, see: Rates Page for latest.

Was the last decade plus just an abnormally low period for fixed rates? Are >1% fixed rates here to stay? Only time will tell.^[3] This matters because the fixed rate is permanent for the entire life of the bond (up to 30 years) and thus a high fixed rate is attractive to investors who are looking to hold long term. Some have even suggested a strategy of cashing in some low fixed rate bonds and buying the newer, high fixed rate bond to be in a better rate position in the future.

Not sure what fixed rate your bond has? Enter the purchase date in calculator below and see how it compares to historical averages.

Before you sell, make sure you have a plan for what you're going to do with the cash. Common options are High Yield Savings Accounts (HYSA), Bank CDs, Corporate Bonds, or other marketable US Treasury Bonds (T-bills, T-notes, TIPs).

Be sure to check out the I Bonds vs. CD's guide as well as others we'll be adding in the future on how to weigh these options against each other, as well as some good resources in the footnotes.^{[4] [5]}

This is a big one that confuses people (including us!). There are two major restrictions on the sale of an I Bond.

1. They can't be sold within 1 year of purchase.^[6]
2. If you sell within the first 5 years you have to forfeit the most recent 3 months of interest.
   (e.g. if you sold in June, you'd lose interest from April, May, and June.^[7] )

This affects the optimal month to sell your bond. Let's say the bond drops in rate below alternatives. If the bond is still less than five years old you might want to wait three months after the rate drop. You want the trailing three month penalty to be summed from months with the lower interest rate.

Once you figure out which month you want to sell, it's generally advised to sell at the beginning of the month. This is because you'll get the same amount of interest as if you sold at the end of the month, but you'll get your money sooner. If you sell at the end of the month, you'll potentially miss out on a full month of interest you could be earning somewhere else like a HYSA or CD.

I Bonds were created for the average Joe investor to protect themselves from inflation, not as an attractive asset class for ultra-high net worth individuals. That's why there is a yearly per-individual limit of $10,000 in electronic Series I Bonds through the Treasury Direct website^[8]. Now, you can get a bit more than that in paper bonds if you do the IRS Tax Refund move, but it's a bit of a hassle.

Why does this matter when considering a sale? Because if you're trying to grow a substantial I Bond portfolio you can only add to it at a rate of ~10k a year. Selling is a one-way street where you won't be able to "catch up" to where you'd be if you had keep plugging in 10k a year.

Need some cash but want to keep earning interest on the rest? Or maybe you need a bit more deposit to hit a CD threshold? Good news, you can do a partial redemption of your I Bond.

Treasure this directive, direct from Treasury Direct:

"How much can I cash at one time? Any amount of $25 or more to the penny. If you cash only part of what a bond is worth, you must leave at least $25 in your account. If you cash only part of what a bond is worth, you get the interest only on the part you cash."

Why this preoccupation with $25? Under the hood, the Tresury appears to basically treat any size of I Bond as a collection of $25 bonds. Buying $100 I Bond? That's really more like 4 X $25 bonds. This is usually abstracted away and doesn't matter, but does effects things like interest rounding.

When you sell your I Bonds, the income you've reaped from the interest is taxable at the federal level. However, I Bond interest isn't subject to state or local income taxes (shout out to the residents of CA, NJ, and NYC).

While the IRS allows you to pay incremental interest each year, most folks defer federal taxes on the interest until they sell (or until bond final maturity). You get a Form 1099-INT, available early the following year.[source]

Spending on Higher Education? You might be in for a tax break. Lots of caveats here that I'm not going to get into, but if you think you might be eligible for this check out the details here.