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I Bond Rates Are Down. Does That Mean You Should Choose a CD Instead?

Before you decide where to keep your savings, here's what you need to know.

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Just a couple of years ago, I bonds were the hot savings account. Savings rates jumped to an impressive 9.62%, much higher than the near-zero rates we were seeing on many savings accounts. But as inflation cools, I bonds aren’t as popular as they once were.

The newest Series I savings bond rate was just released on May 1. From May 1, 2024, to Oct. 31, 2024, I bonds will earn a rate of 4.28%. That’s down from the previous rate of 5.27% they earned from Nov. 1, 2023, to April 30, 2024. But you can earn above 5% annual percentage yield, or APY, with today’s top CDs. Does that mean now’s the time to put your money in a CD instead of an I bond? It depends.

Since the new I bond rate has adjusted down, and CDs have been trending down as well, it’s tougher to determine which is a better deal for investors.

Ultimately, the best savings vehicle for you depends on your financial goals and how much you have available to invest.

What are I bonds?

I bonds are investment products backed by the federal government. They have both a fixed interest rate, which is set when you buy the bond, and a variable rate, which is tied to inflation and adjusted every six months. This variable rate is designed to protect your investments from inflation that could otherwise chip away at your money’s purchasing power.

I bonds are available from the US Treasury in increments of $25, with denominations from $25 to $1,000. You can buy up to $10,000 in I bonds each year, plus an additional $5,000 with your tax refund. You won’t pay state or local taxes on your I bond earnings, but you will pay federal taxes -- although you may qualify for an exemption if you use the earnings to pay for higher education expenses.

You’ll need to leave money in an I bond for at least one year, but it’s better to leave your deposit in the treasury bond for a minimum of five years to avoid interest penalties. 

How I bonds stack up against CDs

Both I bonds and CDs can offer a competitive return on your money. They both require an initial deposit which earns a set interest rate over a period of time. But your variable I bond rate will adjust every six months, while your CD rate is typically locked in.

I bonds also have some deposit limits and early withdrawal rules that CDs don’t have. Here’s a closer look at how the two savings vehicles compare:

CDsI bonds
Where to buyAt a bank or credit unionOnline via the US Treasury 
Interest rateFixed, unless it’s a bump-up CDA fixed and a derivative inflation rate
TermBetween 3 months and 5 years, depending on the bank1 to 30 years (but you shouldn’t withdraw before 5 years)
Minimum deposit requirementVaries by bank$25 
Can you make additional deposits?No, unless it’s an add-on CDYes, but you can only purchase a maximum of $10,000 to $15,000 annually 
Early withdrawal penalty Yes, worth a certain amount of interest if you withdraw before maturity (no-penalty CDs don’t have early withdrawal fee)You’ll forgo 3 months of interest if you withdraw before 5 years; minimum holding period of 12 years 
Is your money protected?CDs at FDIC-insured banks and NCUA-insured credit unions are insured for up to $250,000 per person, per accountI bonds are backed by the US government
How earnings are taxedSubject to state and federal income taxExempt from local and state income tax; subject to federal tax (exemption for earnings spent on higher education)

Should you put your money in an I bond or a CD?

I bonds and CDs are neck-and-neck right now, though you can lock in a slightly higher CD rate at some banks. So, the choice really comes down to when you’ll need your money, how much you have to invest and your risk tolerance.

When to choose a CD

If the investor is not trying to hedge inflation risk and the CD rate is higher (which it is now), I recommend investing in CDs.
  • You’ll need your money soon. You can cash in an I bond after 12 months, but you’ll lose the previous three months’ interest if you access your funds before five years. CDs, on the other hand, come in terms as short as one month, making them well-suited for savers who’ll need their money faster.
  • You want a fixed rate. If you like the predictability of guaranteed returns, you’ll find it with a CD. Your APY will stay the same for the CD’s entire term, regardless of the overall rate environment.
  • You want the highest rate right now. With top CDs offering APYs over 5%, they’re the clear winner if rate alone is your deciding factor. 
  • You have a large amount to invest. You can buy a max of $10,000 to $5,000 in I bonds per year, but jumbo CDs are available in amounts as high as $100,000. These CDs may earn more than some traditional high-yield CDs, depending on the bank and the term.

When to choose an I bond

An I bond may be more suitable for investors who value inflation protection and flexibility, as the interest rate is adjusted semi-annually based on changes in inflation. If investors anticipate rising inflation rates or have a longer investment horizon, I bonds may offer better protection against purchasing power erosion.
  • You want to hedge against inflation. Timing is key when it comes to a CD’s earning potential. Your APY is locked in when you open the account, so your earning potential stays the same whether inflation rises or falls. But I bond rates increase as inflation does. So, if rates rise next year, you would likely earn more with an I bond you opened now than with a CD you opened at the same time.
  • You have a small amount to invest. You can open an I bond with as little as $25. This can make them a good choice if you don’t have a ton of money to put away and you want the inflation protection I bonds offer.
  • You have a longer investing timeline. If you can afford to keep your money out of sight for years, an I bond could offer you a better long-term return than a CD since its rate is directly tied to inflation.
  • You want tax advantages. While CD earnings are subject to both state and federal income tax, I bond earnings are only subject to federal income tax. And if you use your I bond earnings to pay for qualified higher education expenses, you may be able to avoid federal income taxes, too.
Kelly is an editor for CNET Money focusing on banking. She has over 10 years of experience in personal finance and previously wrote for CBS MoneyWatch covering banking, investing, insurance and home equity products. She is passionate about arming consumers with the tools they need to take control of their financial lives. In her free time, she enjoys binging podcasts, scouring thrift stores for unique home décor and spoiling the heck out of her dogs.
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