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Youโve probably heard a lot about I bonds over the past couple of years. But that doesnโt mean you know what the heck they are. Today weโll get into the details of what I bonds are and how they work, plus weโll talk a little bit about why people have been in such a frenzy over them as inflation spiked. If youโre new to investing, thereโs a lot you need to know.
While these bonds can help you earn a little extra cash, theyโre not nearly as attractive as they were a year ago. Depending on why youโre saving money, you might want to keep it in a high-yield savings account instead. But weโll let you be the judge of that as we dive into explaining I bonds.
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The rates for an I bond change every six months.

I bonds are issued by the U.S. government and are considered an extremely safe place to park your money. Youโll never lose the money you put into an I bond; it can only grow.
The rate of interest you can earn on an I bond changes every six months. These rates are designed to match inflation.
Normally, you have to hold onto an I bond for five years before you can take your money back without penalty. But if interest rates fall, you can cash out on your investment early, though you will have to pay a penalty equal to the last three monthsโ worth of interest you earned.
TIP: You have to hold an I bond for at least 12 months. Thatโs the earliest cash-out date.
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Because I bonds are based on inflation, their percentage skyrocketed.
Well, I bond rates are based on inflation. And you know how inflation skyrocketed at the tail end of 2021 and throughout 2022? That means rates on I bonds went way the heck up, too.
โI Bonds have a variable interest rate that matches U.S. inflation over six-month periods,โ says Dave Enna, owner of TIPS Watch. โBeginning in Nov. 2021, because of rising inflation, that interest rate rose to 7.12% for six months, much higher than banks were paying on deposits. Then, in May 2022, the interest rate rose to 9.26%, causing very high demand for I bonds.โ
To give you an idea of just how incredible this was, long-term investors usually aim to get an average annual return of 6% โ 8% over a lifetime of investing through the stock market. To get that much over a 6-month period on such a safe investment is incredibly rare.
At the same time that I bond interest rates were climbing, savings accounts werenโt keeping pace. Despite federal interest rate hikes, we didnโt really start seeing high-yield savings accounts (HYSAs) offering much beyond 2% APR until deep into Fall 2022. (Though now you can easily find an HYSA that pays over 3.25% APR, and in some cases they can get well over 4% APR.)
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The I bond rate today is 6.89%.
Inflation is still obnoxiously high, but itโs been coming down since reaching a peak of 9.1% in June of 2022. Today, inflationโs at 6.4% year over year.
Because inflation started a downward trend, so did I bond rates. But just because the rates have come down doesnโt mean theyโre not still abnormally high.
โOn Nov. 1, 2022, the I bondโs variable rate fell to 6.48%, but the Treasury added a fixed rate of 0.4% to create a six-month combined rate of 6.89% for I Bonds purchased from November 2022 to April 2023,โ says Enna.
These rates will last until May 1, 2023, when a new set will be announced.
Related: 101 Best Side Hustles for Earning Extra Cash
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An I bond is a good, conservative investment.

An I bond is a good investment if youโre looking for something conservative that will match inflation. Inflation wonโt be this high forever. (Dear, Lord, please.) So when we have a more stabilized environment, you wouldnโt expect to see I bonds consistently outperforming riskier investments in the stock market.
Hereโs how Enna approaches it:
โI personally like to have about 15% of my overall portfolio devoted to inflation protection in the form of I bonds and Treasury Inflation-Protected Securities,โ he says. โThatโs conservative and a lot of investors arenโt interested in being conservative.โ
However, Enna notes that the recent spike in I bond interest rates has caused a huge demand from short-term investors.
โThat was a logical move because I bonds are very safe and pay a great return,โ he says. โBut those investors arenโt really interested in inflation protection, they just want the short-term high interest.โ
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Youโll have to pay fees on I bonds if you cash out early.
I bonds arenโt likely to outperform the stock market over the long-term. Thatโs just not what theyโre built to do.
One other thing to keep in mind if youโre after the short-term returns is that if you want to cash out before the 5-year mark, youโll end up paying fees out of some of the interest you earned.
Letโs take a look at an example: say you invested $5,000 in I bonds in October 2022, but you really only wanted to hold them for a year. The annualized interest you earned for the first six months would have been 9.26%, and over the second six months you would earn the current annualized rate of 6.89%.
Over the course of a year, youโd earn a total of approximately $412 in interest. But if you cashed out after a year, youโd have to pay the last three months in interest as a penalty, making your total interest just $321.37, or thereabouts.
If you went out and bought an I bond today, you wouldnโt earn that much. Youโd earn 6.89% for the first six months and then a yet-to-be-announced number for the second six months.
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The I bond rate will likely go down with the Treasury update in May.
Thereโs no way to know the exact number for sure before May 1, but we can be pretty confident that the rate on I bonds will go down with the next Treasury update. Thatโs because inflation has continued on a mostly downward trend. Granted, anything could happen. If inflation skyrockets over the next month, maybe all of the predictions will be moot.
But as for Enna, heโs expecting to see much lower numbers.
โThe variable rate is likely to go lower, maybe to around 2.0 to 2.4%, but thatโs a guess,โ he says. โThe fixed rate will most likely stay somewhere around 0.4%, but that isnโt certain.โ
That would bring the total educated-guess-of-a-rate to 2.4% โ 2.8%, but again, thereโs no way to know if these numbers will hold true. The only way weโll know for sure is by waiting for the announcement in early May.
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You can buy I bonds through Treasury Direct.

Interested in buying I bonds? You can buy up to $10,000 in electronic I bonds per year via Treasury Direct.
If youโre super determined to get paper I bonds, the only way youโll be able to secure them in 2023 is by requesting that the IRS issue your tax refund via paper I bonds. You can only do this up to $5,000 every tax year.
Most people just buy online, though.
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Choosing between an I bond or a high-yield savings account is a close call right now.
In this moment itโs really close if you only want to hold onto your I bond for a year.
Enna ran some potential numbers for I bonds purchased between now and April 30, 2023.
โOver a year, that could be something like 6.89% for six months and then 2.8% for six months,โ he explains. โThat makes for an annual rate of about 4.8%, which is competitive with the best high-yield savings accounts.โ
But he points out that if you sell after a year, youโll lose that last three months of interest.
โThat drops your return to about 4.1%,โ Enna says. โSo if you want to get out after a year, youโd have to consider the rate youโd get on the savings account versus the I bond. A lot of people might choose the savings account.โ
TIP: Did you know some banks will pay you an extra bonus just for opening a new account? No joke. Hereโs how Hannah got paid for opening a new bank account to the tune of $200. And thatโs before interest.
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If Iโm not outearning my HYSA, are I bonds trash?
Definitely not. Enna stresses that I bonds are not get-rich-quick schemes, even if some people have been treating them that way over the past couple of years in this high-inflation environment. The high rates have been an opportunity that lies outside the norm.
The real purpose of these bonds is to build a stockpile of cash protected from the negative impacts of inflation over the long-term,โ he says. โThat means I bonds can provide more protection to your long-term savings, even if youโre being opportunistic with high rates on your short-term savings in an HYSA.โ
Theyโre not likely to give you the same return as an index fund over 30 years, but theyโre likely to beat out a savings account over that same period.
