Revisiting I-Bonds

I-Bonds were a fantastic investment opportunity in 2022 as inflation rates were the highest we had seen in decades. I-Bonds purchased from May 1^st through October 31^st of 2022 earned a return of 9.62% (annualized) for the first six months. Since then, rates on I-Bonds purchased during that period in 2022 have been much more modest- moving from 6.48% to 3.38%, 3.94%, and currently 2.96%. If you purchased I-Bonds in 2022 or have been holding onto them for even longer- now might be a good time to re-evaluate your strategy.

Alternative Investment Options 

• Cash/Cash Equivalents– If the monies you currently have tied up in I-Bonds are funds you’d like to have readily available, cash investment vehicles can earn you an annualized return in excess of 5%. For example, Schwab’s Value Advantage Money Market Fund (SWVXX) is currently paying 5.13%.
• CDs / US Treasuries – If you don’t need the money today but anticipate needing to spend these assets in the short- or intermediate-term, transitioning I-Bond holdings to a Certificate of Deposit or US Treasury can potentially enhance your return, as well as guarantee your rate for a period of time, without increasing the risk of your investment. On the shorter side of the yield curve (6 month or less), you can still earn 5% or more (annualized) at today’s rates. Over 12-36 months, you can expect an annual return in the range of 4.0%-4.7%.
• Market Portfolio – 2022 was a volatile year in the market and I-Bonds were a great place to avoid the negative impact of interest rate movements on your portfolio. If you parked cash in I-Bonds to avoid this risk and won’t need the funds for expenses in the foreseeable future, it might be worth considering adding these dollars back to your market portfolio, at whatever risk tolerance (stock/bond mix) is appropriate for you. This is ultimately where we believe an investor will receive the highest risk-adjusted return in the long-run.

Implications of selling I-Bonds

• Interest Penalty – If you have held your I-Bonds for less than 5 years, there is a 3-month interest penalty on surrendering the bonds. Depending on your plan for reinvestment of the proceeds and the current interest rate you are earning, you could still be better off in the long run after accounting for the penalty.
• Tax – Unless you chose to pay the tax annually, you will owe federal income taxes on the interest earned over the period in which you held your I-Bonds. This income is omitted from state and local tax calculations. Also, if you were subject to the 3-month early withdrawal penalty, you would not owe any tax on this amount because it was never received as income.

Summary

If you are currently holding I-Bonds and are unsure of your best path forward, contact a Rockbridge advisor today and we would be happy to determine an optimal strategy for your individual circumstances.