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The jury is in.
I bought it two years ago when inflation was prevalent, rising to an annual rate of 7.12% in November 2021 and a record high of 9.62% in May 2022. It’s a good time to sell bonds.
Those high annual rates have since subsided as inflation has subsided, and the I bonds scraped together during those heady days are paying about a third of that tempting rate, or 3.97%.
Here’s why: I Bond interest rates consist of a fixed interest rate that applies over the 30-year life of the bond and a variable semi-annual inflation rate calculated from six-month changes in the consumer price index.
The latest I bond annualized yield is 5.27%. This is a high fixed rate of 1.30%, plus a variable rate of 3.97% that resets again in May.
In contrast, the I-bond fixed interest rate was 0% in November 2021 and May 2022, when inflation was soaring. This means that the old bond is now earning a current variable interest rate and term.
What about take-home? Redeem and reinvest.
“I personally sell my products and advise my clients to do the same,” says Daniel Howard, a certified financial planner with Wealth by Design in Glenwood Springs, Colorado. ” he told Yahoo Finance. “Depending on individual cash flow considerations, we are considering money markets, ladder CDs, and corporate bond bullets.”
Investing elsewhere certainly has a lot of appeal. Some certificates of deposit and high-yield savings accounts pay interest rates in excess of 5%. The most attractive CD interest rates, primarily offered by online banks, have recently hovered above 5.5% for one-year certificates, down slightly from 5.87% in December and the highest in more than 20 years. This is part of the high interest rate.
David Enna, founder of Tipswatch.com, a website focused on I bonds and TIPS, says, “I always recommend holding I bonds until you need the cash. Even at 0%, I bonds provide insurance against future inflation.” he told Yahoo Finance.
“But for the past 10 years, there has never been a more attractive alternative. For those with short-term investment timelines, and most of the buyers in October 2022 were short-term investors, I-bonds are currently , not as attractive as other investments such as 4.82% 1-year U.S. Treasuries or 1-year Treasuries. CDs are 5.0% or higher.
“For them, it’s an easy decision: Redeem the I-bonds and reinvest elsewhere.”
To be clear, if you bought these bonds at their peak in 2021 and 2022, you’re already rich. For example, an I bond purchased in October 2022 would return 9.62% over six months and 6.48% over the next six months. This has an average one-year return of approximately 8.05%.
For long-term savers looking for a very safe investment, “I-bonds remain attractive for a small portion of a portfolio,” says Eric Wealth Advisor, Concentric Wealth Management in Lafayette, California. Flett told Yahoo Finance.
However, there are some rules to keep in mind when selling your old I bonds. I Bonds earn interest for 30 years or until they are cashed out, whichever comes first, but cannot be turned into cash until one year has passed.
If you want to cash out the I bonds you bought at the peak, that’s fine.
But in general, I-bond investors should plan to hold for five years or more. Otherwise, “If you sell early, you’re going to take a big haircut. The last guy will lose three months’ worth of interest,” Flett said.
What is my bond?review
I bonds are a type of U.S. savings bond and are issued by the U.S. Treasury.
I Bonds’ main appeal: I Bonds are government-backed and their returns are tied to the Consumer Price Index (CPI), the government’s official measure of consumer price growth, so they keep up with inflation. It is guaranteed to.
New interest rates for I bonds are set by the Treasury in May and November of each year. There are two annual adjustments, so the date you purchase the I bond determines your return.
Investing in I bonds
The bonds can be purchased in allocations of $25 or more without fees when purchased electronically through the U.S. Treasury Department’s website, TreasuryDirect. Paper bonds are sold in five denominations: $50, $100, $200, $500, and $1,000.
Generally, you cannot purchase more than $10,000 of I Bonds in any calendar year. There are several ways to increase it. For example, you can use your federal tax refund to buy him an additional $5,000 in paper I bonds.
Interest is generally free of state and local taxes. You may also avoid federal income taxes if you use the interest to pay for qualified higher education expenses at a qualified institution or state tuition plan in the same calendar year in which you redeem your qualified I Bond.
There is one thing to consider. You can redeem these purchases starting in 2022 and reinvest the cash into new I bonds with a fixed interest rate of 1.3%. “Many of my readers do that,” Enna says.
Kelly Hannon is a senior columnist at Yahoo Finance. She is a workplace futurist, a career and retirement strategist, and the author of her 14 books, including “The World’s Best.”Taking Control Even Over 50: How to Succeed in the New World of Work.” and “You’re never too old to get rich.” Follow her on X @Kellyhannon.
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