After the November 2023 fixed rate was announced to be higher at 1.3%, I’ve gotten a few questions about redeeming “old” Savings I Bonds with lower fixed rates (some at 0%) and buying these “new” ones instead. During this current 6-month period, a lot of them are also earning less than a 4% interest rate when you add the ~3.38% inflation rate. Here are some considerations in making that decision:

When was the fixed rate very low? The fixed rates on your Savings I Bonds were set based on the month of purchase (issue). You can find a list of fixed rates based on issue date here and here. With a few exceptions, look for fixed rates between 0% and 0.30% which occurred with issue dates between May 2008 and October 2018, and again between November 2019 and October 2022.

Find the issue date of your specific savings bonds at or on the face of your paper bond.

3-month interest penalty for savings bonds held less than 5 years. So you’ve found the ones with very low fixed rates. But also remember, if you redeem before 5 years, you lose the final 3 months of interest completely. Your actual interest rate changes every 6 months, and so you can time which 3 months of interest you lose. You may want any period of high inflation to “run out” before you redeem.

Here are redemption dates if you want to time it such that the 3 months interest rate penalty you lose is the only first 3 months of the lower 3.38% inflation rate (which first started in May 2023). Some of the dates have passed, and the window is already open. I first saw this reported by TIPSWatch.

  • Issue month: November/May 👉 Redeem after August 1st, 2023
  • Issue month: December/June 👉 Redeem after September 1st, 2023
  • Issue month: January/July 👉 Redeem after October 1st, 2023
  • Issue month: February/August 👉 Redeem after November 1st, 2023
  • Issue month: March/September 👉 Redeem after December 1st, 2023
  • Issue month: April/October 👉 Redeem after January 1st, 2024

Annual purchase limits. Savings I Bonds have purchase limits of $10,000 per year per SSN (plus another $5,000 via tax return and other ownership title “loopholes”). So if you sell your past existing holdings, you can’t necessarily turn around and buy double or triple your usual amount this year at the higher fixed rate. If aren’t coming close to exceeding the purchase limits, then this is not a concern, and selling savings bonds at 0% fixed rate and buying at 1.3% fixed rate may be a simple and smart move.

Alternatively, you may wish to sell your 0% fixed rate bonds and purchase individual TIPS of a specific maturity instead due to the current higher real yields. I Bonds and TIPS have both similarities and important differences, one of which is that you can never lose money (nominally) with a savings bond, but your long-term TIPS may drop by 10% or more in the short-term.

Tax deferral. Savings bonds have a unique feature that you can defer paying any taxes until you redeem them (or until they mature after 30 years). If you redeem your savings bonds now, you will have to pay any taxes on all of the accumulated interest this tax year. The tax deferral and thus tax-free compounding can increase your overall return if you don’t have other tax-deferred space available. In addition, if your marginal tax rate is very high right now, but you expect it to be much lower in the near future (perhaps in retirement), then you may wish to wait a bit.

My overall take? As you can see, there are lots of little details and exceptions, but… If you’re using savings bonds as a short-term cash reserve or otherwise have another good place for the money, then it’s probably best to sell your 0% fixed rate bonds and re-invest in alternatives.

However, if you’ve been building up a big pile for long-term inflation protection combined with flexibility with taxes and withdrawals, and you are just buying up to the limits every year already, and don’t have other pressing needs for that money, then I don’t feel you’ll be hurt horribly by holding.

Personally, I’ll probably be selling most if not all of my 0% fixed rate bonds over time, with sensitivity to my overall tax brackets. I plan to reinvest into long-term TIPS at 2%+ fixed real rates as tax-deferred space is available.

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Time to Redeem Older Savings I Bonds With Zero or Low Fixed Rates? from My Money Blog.

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