Financial expert highlights advantage of new I bond fixed rate

The fixed rate remains constant for the bond’s entire 30-year lifespan, while the inflation rate adjusts every six months. Currently, bonds issued between November 1, 2026, and April 30, 2027, carry a composite rate of 5.5%, combining the 1.40% fixed rate with a semiannual inflation rate of 2%. This contrasts with older bonds with a 0% fixed rate, which currently have a composite rate of approximately 4.1%.

This difference translates to a tangible advantage. The 1.40% fixed rate adds roughly $140 annually in real return on a $10,000 investment, a gap that compounds over time. Even if inflation were to disappear, the new bonds would retain their fixed rate, while older bonds would not.

Compared to traditional savings options, I bonds also offer competitive returns. The national average 12-month certificate of deposit (CD) yields 1.8%, or about $176 on $10,000, but few options guarantee a return above inflation for an extended period.

Interest earned on I bonds is subject to federal income tax but exempt from state and local taxes, and can be deferred until the bond is cashed.

However, there are limitations. Individuals can purchase up to $10,000 in electronic I bonds annually using their Social Security number, and gift bonds count toward the recipient’s limit. Cashing in a bond before 12 months results in a loss of the last three months of interest, and cashing out before five years incurs a penalty.

Orman suggests swapping older, 0% fixed rate bonds for the new 1.40% rate to better protect savings from inflation, but advises against swapping bonds with higher fixed rates. She emphasized, “And the whole purpose of an I bond is to help protect your savings from inflation. And given where inflation is right now, maybe it’s not a bad idea.”

Before purchasing, investors should verify the fixed rate of their bonds on TreasuryDirect, consider the holding period, estimate potential tax liabilities, and compare after-tax yields with other investment options.