New I Bond rates won't be tantalizing but they could be decent

Inflation isn't as scorching hot as it was back in 2021 and 2022, thankfully, but it hasn't cooled down enough to take the spark out of I Bonds.

On May 1, a new rate for Series I Savings Bonds will be announced by the U.S. Treasury's Bureau of Fiscal Service. We could, based on some estimates, end up looking at an annualized rate of around 4.28% that would apply for a six-month stretch, based on when the bond was issued, for I Bonds bought from May through October.

We are talking about a lower rate than what I Bonds had in late 2023 and early this year. The combined rate for I Bonds issued any time from last November through April was 5.27%. That rate applies only to the first six months after the bond was issued.

Last-minute savers who are able to buy I Bonds before late April — and have them issued in April — would see a 5.27% annualized rate for six months but then expect to see a lower inflation adjusted rate. See TreasuryDirect.gov to buy I Bonds online. Typically, you cannot wait until the very last minute, such as April 30, and receive an April issue date.

New rates for savings bonds are set each May 1 and Nov. 1.

The upswing in inflation in since the COVID-19 pandemic has put a spotlight on I Bonds and upcoming shifts in interest rates.

Based on the most recent inflation figures and how rates are calculated, the new rate for I Bonds could be 4.28%, according to Ken Tumin, a senior industry analyst at LendingTree. Tumin said inflation-adjusted rate that is announced May 1 can be expected to be 2.96% on an annualized basis. That rate is used as part of the math to calculate the annualized rate.

The inflation rate is on top of the fixed rate for all I Bonds, so it's an important number for current and future savers. The interest rate on I Bonds can change every six months after your initial purchase of the bond, based on inflation. If inflation runs hotter, the rate can go up. If inflation cools off, the rate can go down.

The fixed rate portion of an I Bond remains with the life of the bond. The fixed rate is 1.3% for I Bonds issued from November 2023 through April.

We won't know what the fixed rate will be for I Bonds issued from May through October until Treasury announces that rate on May 1. If it remained at 1.3%, though, I Bonds sold during that timeframe would have a combined rate of 4.28% — not as headline enticing as earlier bonds but still far better than keeping money in an everyday savings account or many lower-rate certificates of deposit.

Tumin said he'd expect the fixed rate to remain about the same or increase slightly for I Bonds issued from May through October.

The fixed rate is a key component of any I Bond, and Treasury can tinker with the fixed rates for newly issued I Bonds. I Bonds issued back in 2021 and most of 2022, for example, had a fixed rate of 0%.

By contrast, I Bonds issued from May 2000 through October 2000 have a fixed rate of 3.6% that remains the same for the 30-year life of the bonds.

No, we are not talking about anything close to the mind-blowing annualized rate of 9.62% that led to an onslaught of I Bond sales from May 2022 through October 2022. Those buyers began seeing new, lower inflation-based rates six months after the purchase of those I Bonds.

Many times, I Bond savers who rushed to buy in 2021 or 2022 wonder if they should dump their I Bonds now. The answer depends a great deal on what you plan to do with the money afterward and how prepared you are to take a federal income tax hit.

The interest that your savings bonds earn is subject to federal income tax, but not state or local income tax. You'd owe tax when you sold the bonds.

You can opt to report each year's earnings on your taxes, but most people wait to report all the earnings when they get the money for the bond after cashing it.

Complex rules apply to savings bonds issued after 1989 but some families also may not have to pay any tax on the earnings if they use the money received after cashing these bonds for qualified higher education expenses. See IRS Form 8815. On 2023 returns, your modified adjusted gross income had to have been less than $106,850 if single, head of household, or qualifying surviving spouse; or $167,800 if married filing jointly, to qualify for this education-related tax break.

Any time you sell I Bonds, you want to take a careful look at what's the fixed rate on the I Bonds you're considering selling. Clearly, it's not bad to hold onto I Bonds you bought many years ago that continue to have a fixed rate of 3% to 3.6%.

How much interest you'd get on your I Bonds will vary significantly since fixed rates can be all over the map, depending on when you bought your I Bonds.

And you need to ask: How else might I invest the money? A savings bond is considered a fairly low-risk option. You might compare the yield on I Bonds with what you'd get on certificates of deposit. CD rates can vary. Some are high but others can be fairly low if you don't shop around.

The highest 12-month nationally available CD is now 5.6% from online Northern Bank Direct with a $500 minimum, according to Tumin. Some local credit unions are offering rates on one-year certificates that range from 4.25% to 4.98%.

For those interested in short-term savings, Tumin said, you can earn more if you lock in a high rate with a promotional one-year CD. Again, you'd want to make sure you're getting a higher rate on that CD.

The national average yield on a one-year CD was 1.98% in late April, according to Bankrate.com. That's up from 1.69% a year ago. The highest one-year CD in the Bankrate.com survey is 5.36% though CIBC Bank. The minimum deposit is $1,000.

"But I Bonds can still be a good deal for long-term savings," Tumin said.

One-size-fits-all answers don't apply to whether you keep or sell your I Bonds.

Savers who buy I Bonds cannot redeem, or cash in, those bonds for the first 12 months after purchase.

Some exceptions are made when there are natural disasters. In February, for example, the Bureau of Fiscal Service announced that the one-year minimum holding period was being waived for those in Michigan who were impacted by the severe storms, flooding and tornadoes that hit in August 2023. These bond holders could call Treasury Retail Security Services at 844-284-2676 and briefly explaining the circumstances, or by submitting FS Form 5512, available at www.treasurydirect.gov, to the address in the form. Bond owners should write "DISASTER" on the envelope and at the top of the form’s first page.

I Bonds held less than five years are subject to a three-month interest penalty. You'd lose the most recent three months of interest.

Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X (Twitter) @tompor.

This article originally appeared on Detroit Free Press: New I Bonds rate coming May 1 from US Treasury