The U.S. Treasury Department has announced it will raise the interest rate on its popular Series I bond to 5.27 percent to help offset the effects of inflation. The new rate applies to government-backed bonds issued between November 2023 and April 2024.
The new rate is higher than the 4.3 percent rate on bonds issued between May and October this year. Investors new to Series I bonds can claim the higher rate by purchasing and registering the bonds through April. They will enjoy that rate for six months.
Investors with existing bonds at the lower interest rate of 4.3 will automatically receive the new interest rate when their current six-month period expires. They then enjoy that rate for six months.
How do Series I bonds work?
Series I bonds have been a popular choice for individual investors in recent years because they build in inflation protection. The bonds have a base rate and the Treasury announces a semi-annual inflation adjustment that is paid on top of that, ensuring your payout stays on track with recent inflation rates.
Although the new interest rate of 5.27 percent is higher than before, it is still well below the 9.62 percent offered in 2023. The decline in Series I bond yields reflects falling inflation.
Series I bonds cannot be redeemed for the first twelve months after purchase, and if you redeem one in the first five years, you will pay interest for the last three months as a penalty.
Any U.S. or U.S. resident can purchase up to $10,000 of electronic I-bonds directly through the U.S. Treasury Department through Treasury Direct. But there are little known other ways to buy more.
Series I bonds also offer some tax benefits. The interest on the bonds is exempt from state and local income taxes, so you will only owe taxes on them at the federal level. By using the bond’s interest to pay for education, you may also be able to avoid even having to pay federal taxes.
Is it a good time to buy Series I bonds?
If you are considering investing in Series I bonds, you should consider the above factors, as well as your own financial situation.
As a savings bond, Series I bonds are not subject to principal risk, meaning you will always get your principal back. In contrast, the price of standard government bonds fluctuates with prevailing interest rates. So if you have to sell a government bond before maturity, you may receive less than you pay for it. That said, buying government bonds at a discount can offer more upside potential.
You’ll also want to consider whether you can tie up your money for at least a year and then be willing to pay a penalty of three months’ interest if you pay off the bond in the first five years. If you need your money within a year, pass on Series I bonds.
While you may like the Series I bond rate, it’s important to shop around and see what else is out there. You can get higher nominal interest rates – but without the extra tax benefits – with one of the best CD rates in the country. A CD may be a better choice for those who need a return without principal risk and who can tailor their CD term to when they need the money.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
