The U.S. Department of the Treasury recently announced that Series I bonds will offer an annual interest rate of 4.28% from May 1 through October 2024. This rate is linked to inflation and represents a decrease from the 5.27% rate that was available since November. Additionally, it is slightly lower than the 4.3% rate from May 2023. Both current and new I bond owners will see adjustments in their rates, depending on when they purchased the assets. The Treasury allows for a six-month timeline for rate changes, beginning on the original purchase date.
The Components of I Bond Rates
Series I bonds consist of two main components – a variable-rate portion and a fixed-rate portion. These rates are adjusted by the Treasury every May and November. The variable rate remains the same for the first six months after purchase, irrespective of when the new rates are announced. After this initial period, the variable yield adjusts to the next announced rate. On the other hand, the fixed rate, which is less predictable, remains constant after purchase and can be adjusted or maintained by the Treasury every May and November.
Following a record high annual rate of 9.62% in May 2022, millions of investors flocked to I bonds, driving rates up. However, as inflation has cooled down, rates have since decreased. While short-term savers may find better options for cash at the moment, I bonds continue to be appealing to long-term investors. The fixed rate, currently at 1.3% for purchases made from May 1 through October, is a key attraction for those with long-term investment horizons. Additionally, the tax benefits of I bonds, such as the absence of state or local taxes on interest and the ability to defer federal taxes until redemption, make them an attractive option for long-term holders of emergency funds.
Before investing in I bonds, it is crucial to evaluate your financial goals and timeline. One of the drawbacks of I bonds is that the funds cannot be accessed for at least one year, and a three-month interest penalty is imposed if the funds are withdrawn within five years. Individuals can purchase I bonds online through TreasuryDirect, with a yearly limit of $10,000 per person. However, there are ways to acquire additional bonds, such as buying $5,000 in paper I bonds through your federal tax refund.
Series I bonds continue to be a viable option for investors looking for a safe and inflation-protected investment opportunity. The recent adjustments in interest rates, along with the unique features of I bonds, make them a valuable addition to a diversified investment portfolio. However, it is important to carefully assess your financial situation, goals, and investment horizon before committing to I bonds, as they come with certain restrictions and penalties for early withdrawal. By staying informed and making well-informed decisions, investors can leverage the benefits of I bonds for long-term financial growth.