The U.S. Department of the Treasury announced that Series I bonds will pay a 4.28% annual interest rate from May 1 through October 2024. This rate is down from the previous 5.27% annual rate and slightly lower than the 4.3% rate from May 2023. Current I bond owners will also see their rates adjust based on when they purchased the bonds, with a six-month timeline for rate changes beginning on the original purchase date.
I bonds have two components to their interest rates – a variable rate and a fixed rate. The variable rate is adjusted every six months based on inflation, while the fixed rate remains constant after purchase. The fixed rate for new purchases from May 1 through October 2024 is 1.3%. Long-term investors may still find the I bond’s fixed rate portion to be attractive, as it offers benefits such as tax advantages, including no state or local taxes on interest and the ability to defer federal taxes until redemption.
While short-term savers may have better options for cash, I bonds could still appeal to long-term investors due to their fixed rate and tax benefits. The flexibility to hold I bonds as part of an emergency fund or long-term savings strategy can be advantageous. However, it is important to consider the limitations of I bonds, such as not being able to access the funds for at least one year and facing a three-month interest penalty if funds are withdrawn within five years. Individuals can purchase I bonds online through TreasuryDirect, with a yearly limit of $10,000 per person.
Investors flocked to I bonds after the annual rate hit a record high in May 2022, but rates have since fallen as inflation has cooled. Long-term savers may still find the I bonds to be a viable investment option, especially for those looking to hold onto their investments for an extended period. It is important to understand the mechanics of I bonds, including how the variable and fixed rates work, as well as the restrictions on access and penalties for early withdrawal. By considering your financial goals and timelines, you can determine if I bonds are a suitable investment for your portfolio.
