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When you put money into a deposit account, fighting inflation is an important goal. US Series I savings bonds are designed to do just that, paying both a fixed rate and a rate that varies with the rate of inflation.
Currently, for the first time in decades, certificates of deposit (CDs) are challenging I-bonds for their own inflation-protected spot on the savings table. Since both savings tools require you to put money away without touching it for a year or more, In order to decide between these options, you must try to predict the future and consider the other factors that you must consider.
The central theses
- In today’s economic climate, both I-Bonds and the highest-yielding CDs compete to deliver some of the best inflation-adjusted returns available in a savings vehicle.
- To choose between the two, current and expected future interest rates, remaining terms and prepayment penalties must be compared.
- Ultimately, your personal financial situation and goals will determine what is best for you.
Comparison of I-Bond and CD rates
Current CD yields are the highest in 15 years. Investopedia tracks the top paying CDs on a daily basis from 3 months to 10 years and publishes them in our online ranking to help you get the highest interest rate available.
As of June 16th, the top interest rate for any length CD is 5.65% APY, offered with a 6 month term. In addition, several options pay at least a fixed annual interest rate of 5.00% for terms between 3 months and 3 years.
I-Bond interest rates are fixed every six months, with the US Treasury declaring new semi-annual interest rates on May 1st and November 1st. The term “I-Bond” refers to the fact that the interest rate is set using both a fixed rate and a floating rate based on the current rate of inflation, as measured by the Consumer Price Index (CPI) in the United States.
I-Bonds are currently paying 4.30% and will continue to do so for all bonds purchased through October 31st. Importantly, when you buy an I-Bond, you’re paying the current interest rate for the next six months, starting on the first day of the month you buy it. That means if you buy an I-Bond today (June 16), it will pay 4.30% until December 1, 2023, and then the November 2023 rate until June 1, 2024. This is despite the announcement of new interest rates on November 1, 2023 and May 1, 2024.
By law, you cannot withdraw funds from an I-Bond until 12 months after the date of purchase.
An I-Bond purchased today cannot be redeemed until June 16, 2024. Alternatively, you can purchase a one-year CD at an APR of 5.50% and then redeem that CD on June 16, 2024, or purchase another CD at the then-current rate. Other options would be to open a 6-month CD with an APR of 5.65% – if you think rates will go up – and then open another 6-month CD when the first closes on April 16. December 2023 is due.
In order to be able to choose from this somewhat dizzying range of options, you need to have the best possible estimate of how interest rates will develop in the future. Therefore, a simple comparison of today’s interest rates is not enough to complete the selection process.
Source: Daily rate data from Treasury Direct and Investopedia
Current CD rule
Since an I-Bond cannot be cashed out a year after purchase, you have to assume that inflation and I-Bond interest rates will rise more sharply over the next year than current 1-year CD rates, which are at 5 .50%. With I-Bond yields at 4.30%, CDs appear to have the better return next year.
Also, if you have to redeem your CD, you’ll lose interest, but you’ll likely get your original investment back. This option does not exist for I bonds. While we don’t know what the I-Bond rate will be in November, we do know that headline inflation is slowly coming down.
Unless there is a sudden increase in inflation, CDs could be the best way to save compared to I-Bonds, at least in the short term. If you’re looking to invest for a year or less, short-term, high-yield CDs or high-yield savings accounts offer the best combination of yield and flexibility.
Other considerations for investing in CDs or I-Bonds
I-Bonds have some tax advantages over CDs. In the case of CDs, all income is fully taxable as interest income at both the federal and state levels. I-Bond interest is only taxed at the federal level. Additionally, if you hold I-Bonds, you can choose when you want to report interest, either each year or when you redeem your bond. Finally, I-Bonds, which are used to fund qualifying educational expenses, allow you to avoid federal income taxes.
Despite tax advantages, CDs have a big advantage when it comes to the investment amount. CDs can be opened with deposits of $250,000 (Federal Deposit Insurance Corp. [FDIC] coverage limit) or more, while I-Bonds are capped at $10,000 per taxpayer per year.
Disclosure of Tariff Collection Methodology
Each business day, Investopedia tracks rate data from more than 200 banks and credit unions offering CDs to customers across the country, and provides daily rankings of the best paying certificates for each key time period. To qualify for our lists, the institution must be federally insured (FDIC for banks, National Credit Union Administration). [NCUA] for credit unions) and the minimum CD deposit cannot exceed $25,000.
Banks must be available in at least 40 states. And while some credit unions require you to donate to a specific charity or association in order to become a member if you don’t meet other eligibility criteria (like not living in a specific area or working in a specific type of job). ), We exclude credit unions whose donation needs are $40 or more. For more information on how we select the best fares, see our full methodology.
