Are I bonds making a comeback? Between Nov. 1 and April 30, 2024, I bonds will earn an interest rate of 5.27%. Though this new interest rate is far from I bonds’ record-breaking 9.62% rate in 2022, an above-5% rate is comparable to some of today’s best high-yield savings accounts and certificates of deposit.
I bonds work differently from other savings tools because they’re designed to protect your investment from inflation, earning both a fixed rate for the life of the bond and a variable inflation rate that’s adjusted twice a year. But some CDs also offer high yields over 5%, and their fixed rates guarantee that you’ll lock in a solid return for an entire term.
If you’re debating whether to grow your savings through I bonds or CDs, it’s important to consider the advantages and disadvantages of both. Here’s what to know.
CD rates weekly update
CD rates have been on the rise all year. However several of the banks we track at CNET dropped rates this week across different CD terms, including one-year, 18-month, two-year, three-year and five-year CDs. Three-month CD rates remain the same this week, with an average of 3.47%. And only six-month and nine-month CDs raised rates, with APYs averaging 4.87% and 5.01%, respectively.
Though you can still earn a competitive return on a CD right now, this week’s dip reflects what many experts have noted about savings rates. While rates are unlikely to drop significantly this year, CD rates won’t get much higher than they are now.
Comparing CNET’s average CD rates
| 6-month | 1-year | 3-year | 5-year | |
| FDIC-tracked | 1.39% | 1.79% | 1.38% | 1.38% |
| CNET-tracked | 4.87% | 5.28% | 4.34% | 4.09% |
How do I bonds work?
I bonds are government-backed investments with a variable interest rate that’s pegged to inflation and adjusted every six months. I bonds also have a fixed rate for the life of the bond, issued at the date of purchase. The new fixed rate of 1.30%, the highest since 2007, together with the variable inflation rate is what gets you the current earnings rate of 5.27%. As long as you buy an I bond before April 30 of next year, you’ll have a 5.27% interest rate for a full six months before the rate changes again.
You can buy up to $10,000 in I bonds directly through the US Treasury every year, and you can also get an additional $5,000 with your tax return. There’s a 12-month holding restriction when you buy an I bond, meaning you can’t access your funds for the first year. If you need to redeem your I bonds within the first five years, you’ll miss out on the last three months of interest.
Your earnings from I bonds are exempt from state or local taxes, but you have to pay federal income tax on the gains. However, if you use your earnings from an I bond to pay for higher education, you may not have to pay any taxes on the interest.
I bonds vs. CDs
I bonds and CDs are both safe places to store your investment with attractive yields, but there are key differences that will complement certain savings goals more than others. For instance, if you’re working with a short-term timeline, you shouldn’t put your funds in an I bond because you can’t withdraw funds within the first year. But if you’re setting aside money for a child’s education or a long-term goal, an I bond allows you to earn interest no matter what happens with the economy.
“I bonds may be better for long-term savings given their inflation protection, while CDs could be preferable for those seeking a guaranteed rate of return,” said Taylor Kovar, a certified financial planner with Kovar Wealth Management.
With a CD, you’ll have more variety to choose the length of your term, generally from six months to five years, during which time you’ll get a fixed interest rate on your deposit. Unlike with an I bond, your earnings rate won’t change every six months. Just keep in mind that while CDs are readily available at most banks, their rates vary widely depending on the financial institution and the term length.
| CDs | I bonds | |
| How to purchase | From a bank or credit union | Online via the US Treasury |
| Interest rate | Fixed, unless it’s a bump-up CD | A fixed and a derivative inflation rate |
| Term | 3 months to 5 years, depending on the bank | 1 to 30 years (but you’ll lose out on the last 3 months of interest if you redeem before 5 years) |
| Minimum deposit | Varies depending on the bank | $25 |
| Additional deposits | No, unless it’s an add-on CD | Yes, but you can only purchase a maximum of $10,000 annually |
| Early withdrawal penalty | Yes if you withdraw before maturity (no-penalty CDs aren’t subject to an early withdrawal fee) | The minimum holding period is 12 months, but you forgo 3 months of interest if you access funds in the first 5 years |
| Risk | CDs at FDIC-insured banks and NCUA-insured credit unions are insured for up to $250,000, per person, per account | I bonds are backed by the US government |
Should you get an I bond instead of a CD right now?
I bonds are a valuable inflation-protected savings tool, making them a virtually risk-free investment. When you buy an I bond, “the purchasing power of your investment is preserved,” said Doug Carey, a certified financial analyst.
Though the current I bond rate isn’t the highest it’s ever been, it’s higher right now than most of the CD rates we track at CNET. “It’s an attractive time to buy for those looking for a low-risk investment that keeps pace with inflation,” Kovar said.
Even though I bonds are considered safe and backed by the government, there’s a limit to how much you can purchase annually. You can only buy up to $10,000 in I bonds per person, per calendar year (and an additional $5,000 with your tax return). With a CD, your deposit will be protected up to $250,000 at an FDIC-insured bank or NCUA-insured credit union.
To determine whether an I bond or a CD matches your savings goal, ask yourself these four questions, according to Lei Han, a certified public accountant and associate professor of accounting at Niagara University.
- How much money do you plan to invest? I bonds have an annual limit of $10,000 per person, while CDs do not have a cap. If you plan on investing more than $10,000 in one calendar year, an I bond might not be the right move for your money.
- Do you want a fixed interest rate or a variable interest rate? Unlike a CD, where you lock in a rate for a set period of time, I bonds have two rates: A fixed rate that remains the same over the lifetime of the bond and a variable rate that fluctuates twice a year with inflation. If you have a long-term savings goal, you might benefit from locking in a rate with a CD while rates are high.
- What’s your time horizon? CDs have more choices for relatively short-term investments, ranging from a few months to five years. If you have a short-term goal, you can’t access your funds in an I bond for at least a year. But you’ll also risk losing three months of interest if you withdraw funds in the first five years.
- Do you need liquidity? I bonds and CDs aren’t suitable for most emergency funds because they lack the liquidity most savings accounts offer. If you’re looking for a savings vehicle to continue adding to your emergency fund while having easy access to your cash, consider a high-yield savings account or a money market account.
Pros and cons of I bonds
Pros
Interest rate tied to inflation: The US Treasury adjusts the variable interest rate twice a year based on current inflation rates.
Exempt from state and local taxes: You don’t have to pay state or local taxes, but I bonds are subject to federal income taxes.
Low minimum requirement: You only need $25 to purchase an I bond.
Cons
12-month holding period: You can’t access your funds for the first year. If you need your money before five years, you’ll miss out on the last three months of interest.
Purchase cap: You can only buy up to $10,000 in I bonds every year, with one exception: You can buy an additional $5,000 with your tax return.
Federal income tax: You have to pay federal income taxes on your I bond unless you use it for higher education expenses.
Pros and cons of CDs
Pros
Fixed APY: CDs offer a guaranteed rate of return for the length of your term.
Federally insured: Your deposit plus interest earned are protected for up to $250,000 per person, per account at an FDIC-insured bank and an NCUA-insured credit union.
Several term options: Most banks offer several types of CDs and terms to choose from, ranging from six months to five years.
Cons
Early withdrawal penalties: If you withdraw funds before the CD matures, you’ll typically pay an early withdrawal penalty.
Less flexibility: You can’t add funds to your initial deposit, unless you have an add-on CD.
Risk of a lower return: You’re locked into the rate you were assigned at the date of opening, unless you have a bump-up CD. If interest rates go up, you’ll miss out on the higher rate.
Determine your savings goal before choosing
In today’s rate environment, an I bond offers a competitive yield with relatively low risk. But choosing an I bond depends on your financial circumstances and personal savings goals.
You should consider whether you want to lock up your money for at least one year and forfeit interest if you withdraw funds before the first five years. If you know you need your money sooner, you might want to rule out an I bond.
If you need cash liquidity and easy access to your money, look for a more flexible option. Some of the best high-yield savings accounts earn over 5% APY right now. But if your main priority is locking in a fixed rate for a set period of time, a certificate of deposit might fit your goals more than an I bond.
