I Bond Rate Hits 1.40% Fixed: Buy in December and January

You have $20,000 sitting in a savings account, and you keep meaning to do something smarter with it. Then the new I bond rate lands: a 1.40% fixed rate on top of inflation, the best offer savings bonds have made in two decades. The Treasury caps purchases at $10,000 a year, so it looks like you can only put half your cash to work.

You can actually do better than that. The 1.40% fixed rate holds for purchases from November through April, and those six months straddle the new year. That gives you two separate $10,000 allowances at the same rate, one that expires on December 31 and one that opens in January.

This guide shows what the new rate pays, how the December and January purchases stack, when swapping an old bond makes sense, and who should leave I bonds alone.

What the New I Bond Rate Pays

Every I bond earns two rates added together. The fixed rate never changes for the life of the bond. The inflation rate resets every six months, based on the change in the consumer price index.

According to TreasuryDirect's I bond rate page, bonds issued from November 1 through April 30 get a 1.40% fixed rate and a semiannual inflation rate of 2.04%. Combined, that is a 5.51% composite rate. The fixed rate was 0.90% for bonds bought in the previous six months.

Treasury doubles the six-month inflation figure to get an annual one (4.08%), adds the fixed rate (1.40%), and adds a tiny cross term (1.40% times 2.04%, about 0.03 points). That sum rounds to 5.51%.

Why the fixed rate is the number that matters

The 5.51% headline will not last. In six months your bond picks up whatever inflation rate Treasury sets next, which could be higher or lower. The 1.40% stays with that bond for 30 years.

Think of the fixed rate as your guaranteed return above inflation. A bond with a 0% fixed rate only keeps pace with prices. A bond at 1.40% grows your purchasing power by 1.40% a year, every year, for as long as you hold it. A report in Money called it the highest fixed rate in 20 years, and the Military Officers Association of America noted it matches the rate set in November 2006.

Two Purchase Windows, One Fixed Rate

TreasuryDirect lets one Social Security number buy up to $10,000 in electronic I bonds per calendar year. The limit resets on January 1. The fixed rate, though, follows Treasury's six-month schedule, which runs from November through April.

Those two calendars do not line up, and that mismatch is the opportunity. If you have not bought I bonds this year, you can buy $10,000 now and another $10,000 in January, February, March or April. Both purchases lock in 1.40%.

Wait until January for both, and you lose one of them, because the December allowance does not carry over.

A worked example for a couple

Say you and your spouse each open a TreasuryDirect account. Here is how the money flows:

• December: you each buy $10,000, using this year's limits. That is $20,000.
• January: you each buy $10,000 again, using next year's limits. That is another $20,000.
• Total at 1.40% fixed: $40,000.

For the first six months after purchase, each $10,000 bond earns half the 5.51% annual rate, about $275.50. Across $40,000, that is roughly $1,102 in the first six months. After that, the rate becomes 1.40% plus whatever inflation rate Treasury sets in May.

The long-run gain comes from the fixed rate. Compare a $10,000 bond at 1.40% fixed with one at 0% fixed over ten years. Compounded twice a year, the extra 1.40% adds up to about $1,500 more in today's dollars, whatever inflation does in between.

How to Time Your December Purchase

Savings bonds have a quirk that rewards buying late in the month. Under the federal savings bond rules (31 CFR 359.49), an electronic I bond's issue date is the first day of the month it posts to your account. A bond bought on December 22 earns interest as if you bought it on December 1.

The risk runs the other way. TreasuryDirect says purchases generally post within one business day, and a non-business day rolls to the next one. If your purchase slips into January, it counts against next year's limit and you lose this year's allowance.

A sensible middle ground is to schedule the purchase a week or so before December 31. You still collect a full month of December interest, and you leave room for a holiday or a bank delay.

Set up the account first

New TreasuryDirect accounts need identity verification and a linked bank account. If you have never used the site, open the account in November, not on December 28. A spouse needs a separate account, because the limit attaches to each Social Security number.

Should You Swap an Old I Bond for the New Rate?

If you bought I bonds in 2022, you may own some with a 0.00% fixed rate. TreasuryDirect's own table shows the fixed rate was zero for bonds bought from May through October 2022, and 0.40% for the six months after that.

Those bonds now earn only the inflation rate, 4.08% right now, according to Money. David Enna, who writes the Tipswatch blog on inflation-protected investing, suggests redeeming 0.0% and 0.1% bonds to fund new purchases at 1.40%. The case is strong, but you have to run three numbers first.

The three costs of a swap

1. The early-redemption penalty. Bonds under five years old lose their last three months of interest. A May 2022 bond turns five in May of next year. On a bond worth $13,000 earning 4.08%, three months of interest is roughly $133.
2. The tax bill. Cashing a bond makes its accrued interest taxable for federal purposes that year. If that $13,000 bond holds $3,000 of interest and you are in the 22% bracket, you owe about $660. This is a tax you would owe eventually, so the real cost is paying it now instead of later.
3. The purchase limit. Reinvested proceeds still count against your $10,000 limit, just like fresh cash.

Now the payback. Moving $10,000 from 0% fixed to 1.40% fixed earns roughly $140 a year in extra real return. That covers a $133 penalty in about a year, and every year after is pure gain. If you have no other cash to fund the purchase, the swap usually wins. If you do have spare cash, buy with that and leave the old bond alone until it turns five.

One more timing detail from Enna: redeem early in a month. A bond earns no interest for the partial month you cash it in, so redeeming on the 2nd and on the 28th pay the same.

How the I Bond Rate Compares With Treasuries

I bonds are not the only inflation-protected option, and they are not automatically the best. The Treasury's own daily data shows the 5-year TIPS real yield at 2.68% on November 13, per the U.S. Treasury real yield curve. That beats the 1.40% fixed rate on paper.

The catch is that TIPS trade on the market. Sell before maturity and the price can fall, as it did when real yields jumped earlier this month. An I bond never loses value, and you can cash it at full value after a year. You are paying for that safety with a lower real rate.

For short-term cash, the 1-year Treasury yield sat at 4.65% on November 13, per the same Treasury dataset. Here is how the three stack up:

• I bond: 5.51% for the first six months, then 1.40% plus inflation. Locked for 12 months. No price risk. Federal tax can be deferred until you cash it.
• 5-year TIPS: 2.68% above inflation if held to maturity. Price moves daily. Inflation adjustments are taxed each year.
• 1-year Treasury: about 4.65% nominal. No inflation protection. Your money is back in a year.

All three are exempt from state and local income tax, which matters most if you live in a high-tax state. If you want to see what inflation does to cash over time, try our inflation calculator, or read how bond yields signal where rates are heading.

Who Should Skip I Bonds

I bonds suit money you will not touch for at least a year. Two kinds of cash belong elsewhere.

• Your emergency fund. The 12-month lock is absolute. If your car dies in March, an I bond bought in December cannot help. Keep three to six months of expenses somewhere liquid, as our guide to where to put cash as savings rates fall explains.
• Money you need within five years. Each early exit costs three months of interest. That is a small drag, but it adds up if you cash in and out often.

Frequently Asked Questions

What is the current I bond rate?

I bonds issued from November 1 through April 30 earn a 5.51% composite rate, according to TreasuryDirect. That is a 1.40% fixed rate plus a 2.04% six-month inflation rate. The fixed part stays for the life of the bond, while the inflation part resets every six months.

Can I buy $10,000 of I bonds in December and again in January?

Yes. The $10,000 limit applies per Social Security number per calendar year. A December purchase uses this year's limit and a January purchase uses next year's. Both lock in the 1.40% fixed rate as long as they are issued by April 30.

Should I cash in old I bonds with a 0% fixed rate?

Often, yes, if you have no other cash to buy new bonds. Weigh the three-month interest penalty on bonds under five years old and the federal tax on accrued interest. A 1.40% fixed rate on $10,000 adds about $140 a year in real return.

Are I bonds better than TIPS right now?

TIPS pay a higher real yield, 2.68% for five years per Treasury data, but their market price can fall before maturity. I bonds pay less above inflation and never lose value. Choose I bonds for safety and TIPS for a higher real return on larger sums.

Lock In 1.40% Twice Before April

The new I bond rate gives you a fixed return above inflation that bonds have not offered since 2006. Because the purchase limit resets on January 1 while the rate holds until April 30, you get two chances at the same deal, and the first one closes on December 31.

Open your TreasuryDirect account this month. Buy your first $10,000 a week or so before year end, and set a reminder for January to buy the second. Then check any 2022 bonds in your account, because those may be worth swapping too.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Always consult with a qualified financial advisor before making investment decisions. Past performance is not indicative of future results.