If you want to keep all your good interest and get the most out of your I Bonds you should cash out: after earning 3 months of lower interest and. just after the 1st of the month.
In recent years, I Bonds saw a lot of adoption because inflation was high, and interest rates on other investments were pretty low. But in 2023 and 2024, the outlook for I Bonds is mediocre at best. With today's higher interest rates, other investments are looking more attractive.
Cons of I Bonds
This cap makes I Bonds unsuitable for those looking to invest larger sums. Early withdrawal penalty: If you cash in your I Bonds before five years have passed, you lose the last three months of earned interest. This penalty may impact liquidity for those who need their funds sooner.
Series EE bonds issued today will mature in 20 years, and they are guaranteed to double in value over that time. You can let the bond continue to accumulate interest for an additional 10 years after maturity.
For example, a bond trading at $900 with a $1,000 face value and a $60 coupon has a 6% coupon rate and a current yield of 6.7%.
I-bonds are also attractive because investors bear almost no risk of losing their principal. The composite rate can never be less than 0%, even during deflationary periods when the inflation rate is negative.
Must I pay tax on what the bond earns? You choose whether to report each year's earnings or wait to report all the earnings when you get the money for the bond. If you use the money for qualified higher education expenses, you may not have to pay tax on the earnings.
Unlike I-bonds, TIPS are marketable securities and can be resold on the secondary market before maturity. When the TIPS matures, if the principal is higher than the original amount, you get the higher amount. If the principal is equal to or lower than the original amount, you get the higher original amount.
Currently, Treasuries maturing in less than a year yield more than CDs. However, at maturities of one year and beyond, CDs yield a little more before taxes. Therefore, all things considered, it likely makes more sense to choose Treasuries over CDs for shorter-term investments, but it depends on your situation.
I Bonds earn interest each month, and the interest is compounded every six months. You can earn interest on them for as long as 30 years, and can cash them out after 5 years without losing interest.
Use the Education Exclusion
With that in mind, you have one option for avoiding taxes on savings bonds: the education exclusion. You can skip paying taxes on interest earned with Series EE and Series I savings bonds if you're using the money to pay for qualified higher education costs.
One-year minimum holding period: You cannot redeem I Bonds until you've held them for at least 12 months. Penalties for early redemption: If you redeem your bonds within the first five years, you'll forfeit the last three months of interest.
Note: You only get a 1099-INT if you actually got the interest on a savings bond. If you are waiting until your EE or I bond matures (finishes its life) to take the interest on it, you will not get a 1099-INT for that bond until we actually pay you the interest.
Roth Individual Retirement Account (IRA) or Roth 401(k): Interest earned in a Roth account is not taxed until it is withdrawn. And, if you are older than age 59 ½, you will owe no income taxes at all on the interest. However, early withdrawals before age 59 ½ incur a 10% penalty in addition to any income tax due.
For electronic savings bonds as gifts, both you and the recipient must have a TreasuryDirect account. TreasuryDirect is the official United States government application in which you can buy and keep savings bonds. You can gift a savings bond to adults or children.
Bonds usually go up in value when the stock market crashes, but not all the time. The bonds that do best in a market crash are government bonds such as U.S. Treasuries. Riskier bonds like junk bonds and high-yield credit do not fare as well.
Purchase prices start at $25, and you can buy in any amount above that up to $10,000 per person, per calendar year. You also can buy an I bond in paper form, through the Tax Time Purchase Program.
Investors should be aware of the risk that they could lose money by purchasing and selling bonds before their maturities. A Treasury bond with its longer maturity date might not be a good investment if the investor is going to need the money in the next year or two.
The “dirty price” is the total amount you pay for a bond, which includes any interest that has built up since the last payment. On the other hand, the “clean price” is just the bond's listed value without that extra interest.
4 Week Treasury Bill Rate is at 4.25%, compared to 4.24% the previous market day and 5.27% last year. This is higher than the long term average of 1.52%. The 4 Week Treasury Bill Rate is the yield received for investing in a US government issued treasury bill that has a maturity of 4 weeks.
one key risk to a bondholder is that the company may fail to make timely payments of interest or principal. If that happens, the company will default on its bonds. this “default risk” makes the creditworthiness of the company—that is, its ability to pay its debt obligations on time—an important concern to bondholders.