Why (and When) I’m Selling My I Bonds from April 2022
Back in April 2022, I was excited about I Bonds. And now I’m excited to sell them soon.
I Bonds have earned a nice return, but because inflation is down substantially since April 2022 and interest rates are up, better yields are now available to cash them in and reinvest the proceeds.
What are I Bonds?
Technically called a Series I Savings Bond, and is commonly referred to as an I Bond.
When you invest in an I Bond, there are two components to earning a return on your investment:
- A set interest rate over the life of the bond (currently 0.9%).
- An adjustment for inflation, which occurs every 6 months (currently 3.38%).
There are a number of factors you need to consider before purchasing or selling any I Bonds:
- They can’t be redeemed for at least 12 months. So this is not an appropriate place to invest any funds that you know will be needed within the next year.
- If you cash them in within the first 5 years, you forfeit the previous 3 months’ worth of interest. If you plan to hold them for only about 12 months, you would effectively only earn about 9 months’ worth of interest over that 12-month period given this early withdrawal penalty. So ideally, you want to wait to cash them in when the penalty is low.
- You can only purchase up to $10,000 per person, per year, with a minimum purchase of $25. Up to an additional $5,000 can be purchased through your federal tax refund, if applicable. Plus some trusts and estates qualify as additional qualifying entities, as well as certain businesses. You can also purchase I Bonds for children under age 18. So a married couple with two children, separate revocable living trusts, at least a $5,000 federal tax refund, and a qualifying business may be eligible to purchase up to $75,000 of I Bonds in one calendar year. (Note that you should speak with a qualified attorney and/or tax professional to help you determine whether it is appropriate to purchase investments in the name of your children, as it may require a gift tax return and/or create tax filing requirements for your children.)
- You can’t invest in I Bonds using your IRA or other retirement savings plans.
How are I Bonds taxed?
Unlike some other bonds, you have the flexibility on when the income will be taxed. You can either:
- Report the interest and pay taxes on it each year (or)
- Wait and report the interest when you
- Redeem it
- Transfer ownership (or)
- The bond matures, which is in 30 years from the original purchase date
Also note that you can potentially exclude taxable income on I Bonds for education planning if all of the following apply:
- You cashed in the bonds the same year you paid qualified higher education expenses for yourself, your spouse, or your dependents.
- Your filing status is not married filing separately.
- Your modified adjusted gross income (MAGI) is less than $91,850 for single, head of household, or qualifying widow(er)s or $167,800 for married filing jointly in 2023. This is a phase-out, so you could make more with a partial I Bond income exclusion.
- You were 24 or older before your savings bonds were issued.
See IRS Form 8815 for more information.
When should you sell I Bonds?
Once the 12-month window is up, you are free to sell them at any time. Since I Bonds are taxable at redemption, be sure to account for the additional interest in your overall tax planning strategy. For example, if you are going to retire in 2024, it may be beneficial to wait until at least January 1, 2024, to redeem them and potentially pay a lower tax rate on the accumulated interest.
Depending on the purchase date, here are some examples of when you might want to consider redeeming them to help minimize your 3-month penalty:
|Purchase Month||Potential Redemption|
|January 2022||October 1, 2023|
|February 2022||November 1, 2023|
|March 2022||December 1, 2023|
|April 2022||January 1, 2024|
|May 2022||August 1, 2023|
|June 2022||September 1, 2023|
|July 2022||October 1, 2023|
|August 2022||November 1, 2023|
|September 2022||December 1, 2023|
|October 2022||January 1, 2024|
|November 2022||November 1, 2023|
|December 2022||December 1, 2023|
Given the peak of my excitement was in April 2022, let’s focus on the logic behind potentially selling in January 2024.
From April – September 2022, you earned an annualized yield of 7.12%. From October 2022 – March 2023, you earned an annualized yield of 9.62%. From April – September 2023, you earned an annualized yield of 6.48%. And now in October 2023, your rate will reset to 3.38%.
If you purchased in April 2022 and sell in October 2023, your penalty will be ~1.62%. However, if you wait until January 2024, your penalty will only be ~0.84% since the last 3 months of interest will be lower.
Of course, when to take the penalty also depends on how much you can earn on another alternative. With short-term Treasuries currently yielding about 5.5%, you’re better off waiting to take the lower ~0.84% penalty. But if you find an alternative paying about 7% or more, then you’re likely better off taking the higher ~1.62% penalty and reinvesting the proceeds at the higher rate.
Other Alternatives to I Bonds
There are a number of competitive alternatives to I Bonds. These include U.S. Treasuries, CDs, money market mutual funds, money market accounts, online savings accounts, TIPS, or even investing in new I Bonds as the fixed rate is now 0.9%, plus the inflation factor. This I Bond fixed rate may even be higher in November based on current interest rates. We’ll see. The best option for you depends on time horizon, liquidity need, risk tolerance, and other factors.
For alternatives at Charles Schwab, see here: https://manukafinancial.com/how-to-maximize-your-after-tax-yield-on-cash-at-charles-schwab/.
How do I sell I Bonds?
When you’re ready to sell, go to https://www.treasurydirect.gov/.
Input your account number, which can be found in the original email from Treasury Direct when you established the account. It will then email you a one-time password and then ask for your account password. Once logged in, click “SAVINGS BONDS” under the “Current Holdings” section in the middle of the webpage. Then at the bottom of the next page select Series I Savings Bond, and it will show a list of Series I Savings bonds you own in that particular account.
Select the bond(s) you wish to sell, then click and follow the prompts.
Don’t forget you may have purchased some individually, for a spouse, business, estate, and/or trust. So make sure you redeem all the bonds you wish to cash out. Any I Bonds left invested will continue to earn interest based on recent inflation data at each 6-month reset.
How much did you earn?
If you purchased I Bonds in April 2022 and redeem them in early January 2024, you should earn about $1,208 before tax on a $10,000 purchase after the penalty is deducted, or about a 6.53% annualized yield over that 21-month time period. Not bad given 12-month T Bill rates were less than 2% in April 2022!
Obviously, no one is getting wealthy off of these given the $10,000 annual limit. But if you were able to purchase $40,000 or more as a couple with trusts and/or businesses, hopefully the ~$4,832 you earned or so was worth the hour of your time to research, purchase, and redeem them.
Note that if you purchased I Bonds before or after April 2022, you can see the average annual increase information here: https://eyebonds.info/ibonds/index.html. You’ll just need to adjust the rate for the penalty if redeemed within the first five years of purchase.
Investing in I Bonds in April 2022 proved to be an attractive strategy as an alternative to holding excess cash that wasn’t needed for at least 12 months. But with lower inflation and higher yields on alternative investments, the I Bond party seems to be over. At least for now.
About the Author
Michael T. Powers, CPA, PFS, CFP® (Mike), is a flat fee-only financial planner based in Richmond, VA serving clients virtually nationwide. He has been fortunate enough to help hundreds of people successfully retire over his career. As a CPA, being tax efficient in financial decisions is always on his mind.
Photo by Nicholas Cappello on Unsplash.
All written content on this site is for information purposes only. Opinions expressed herein are solely those of MF, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.
The information on this site is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, MF disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose. MF does not warrant that the information will be free from error. None of the information provided on this website is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. Under no circumstances shall MF be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the materials in this site, even if MF or an MF authorized representative has been advised of the possibility of such damages. In no event shall Manuka Financial have any liability to you for damages, losses, and causes of action for accessing this site. Information on this website should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.