Good Not Great

Mike Zaccardi

SERIES I SAVINGS bonds are getting a lot of attention right now because their stated yield is 3.54%, an apparently fabulous interest rate on an almost no-risk investment.

But don’t be fooled: While I bonds are a fine choice for super-conservative investors, you’ll get that 3.54% annualized yield for just six months and thereafter the yield could be far lower.

I bonds feature a variable interest rate that floats with inflation. That floating rate resets each May and November based on recent inflation. The latest adjustment moved the annualized floating rate up from the Nov. 1, 2020, figure of 1.68%.

There’s also a fixed rate component to the bonds—a yield over and above inflation—but that yield is zero for I bonds bought during the current six-month purchase period, which started May 1. In other words, if you purchase I bonds today, your pretax return will equal the inflation rate.

We’ve all seen the recent headlines about rising prices. Home values, food, raw materials and even wages are seeing upward pressure. Economists at Bank of America Global Research expect 12-month inflation to peak at 3.7% in February 2022. For 2021 and 2022, Bank of America sees core inflation, which excludes food and energy, to hum along at 2.9% and 2.7%, respectively.

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While simply matching inflation doesn’t seem so bad when savings accounts, money market funds and many high-quality bonds are yielding less than inflation, I bonds come with drawbacks. Here are key facts you need to know about I bonds:

  • We don’t know what the rate will be at the Nov. 1 reset. The new annualized rate could be well below the current 3.54%.
  • When you redeem an I bond or when it matures, the interest is taxable at the federal level, but it isn’t subject to state and local taxes. That makes I bonds more attractive if you live in a high-tax state. But wherever you live, the net result is that, if you buy I bonds today, your after-tax return will be less than the inflation rate.
  • You’re limited to purchasing $10,000 of I bonds each calendar year. You can push that $10,000 annual limit to $15,000—but only if you have a $5,000 federal tax refund that you use to buy I bonds.
  • You can’t sell an I bond in the first 12 months after you purchase. Meanwhile, if you redeem in the first five years, you lose the last three months of interest.

Let’s say you bought $10,000 of Series I bonds today and wanted to sell after a year. What’s your net return? We’ll assume the interest rate stays the same at the November reset. If you invest $10,000 at 3.54%, you’d earn $354, but you would give back a quarter of the interest due to the early redemption penalty. That would leave you with 2.655%. You would then have to pay tax on the $265.50 in interest. If you’re in the 22% federal tax bracket, you’d be left with a 2.07% after-tax return—not exactly the road to riches, but not bad for a pretty much no-risk investment.

By contrast, the current SEC 30-day yield on the iShares Core U.S. Aggregate Bond ETF (symbol: AGG) is 1.33%, which would be 1.04% after-tax, assuming a 22% rate. The ETF could also suffer a capital loss if interest rates head higher.

The bottom line: Series I savings bonds look appealing and strike me as an okay investment for conservative investors. But don’t count on earning 3.54% for years to come. Moreover, compared to the iShares fund, we’re talking about perhaps a 1% net return difference on a $10,000 investment over the next year, equal to $100. That’s nothing to sniff at—but there are probably bigger financial issues to focus on.

Mike Zaccardi is an adjunct finance instructor at the University of North Florida, as well as an investment writer for financial advisors and investment firms. He’s a CFA® charterholder and Chartered Market Technician®, and has passed the coursework for the Certified Financial Planner program. Follow Mike on Twitter @MikeZaccardi, connect with him via LinkedIn, email him at and check out his earlier articles.

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Mark Royer
Mark Royer
1 year ago

I take it I Bonds are not available in IRA accounts, only taxable accounts?

Jofi Joseph
Jofi Joseph
1 year ago

I Bonds are a great option for cash savings that you will not necessarily need in the next year, but perhaps in the one to five year range. No one is arguing this should be your entire portfolio allocation.

This post has some good points, but I would also take a look at Jason Zweig’s recent column in the Wall Street Journal on why I-Bonds are suitable to complement an existing portfolio.

Also, given the recent inflation data, I would be highly surprised if the next interest rate reset for I Bonds does not exceed the current 3.54%.

Andrew Forsythe
Andrew Forsythe
1 year ago

Mike, excellent article and thanks for laying out the pros and cons of I bonds so clearly. I’ve given these a little thought but the investment caps and other limitations have held me back.

Maybe you would consider an article about Toyota Income Driver Notes? I read just a little about them in the Boggleheads forum and they look interesting. That said, I’m not sure I’d like to bet “safe money” on the solvency of any one company, even Toyota.

1 year ago

I don’t know if it was the intent, but this shows its a pretty compelling reason to buy I bonds. If the rates fall one can always take the money out, but right now the rate far exceeds anything one can get in a savings or money market account. Looks like a great place to park emergency funds.

1 year ago
Reply to  IAD

I like I-bonds, but I wouldn’t park my only “emergency ” money there. If I went to sell any, it would be the first time I’ve ever done so. On top of that, the website is from the dark ages, and not user friendly. I wouldn’t want to be dealing with this in a true emergency. I know I can sell an Ally CD in about two minutes with no hassle. Just something to think about beyond the risk/return aspect.

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