Should I Sell My I Bonds? What to consider before redeeming series I savings bonds

Series I savings bonds, issued by the U.S. Treasury, exploded in popularity in 2021 and 2022. When the composite interest rate on I Bonds soared above 9%, millions of Americans rushed to their TreasuryDirect account to purchase the maximum $10,000 per person. It was one of the few moments when a low-risk investment backed by the federal government offered a rate of return that rivaled far riskier assets.

Now, with inflation moderating and interest rates shifting, the question on many investors’ minds is: Should I sell my I Bonds? How long should you continue to hold, and what are the alternatives?

The answer depends on when you purchased your bonds, the fixed rate of the bonds you own, and your tax situation. In this article, we’ll walk through the key considerations you need to make, compare I Bonds to other low-risk savings options, and highlight the tax planning strategies that can make a real difference for retirees.

I Bonds as Investments, and Alternatives

Historically, investments held within a Roth IRA or traditional IRA have significantly outperformed I Bonds over the long term.

If your I Bonds are delegated for long-term savings, and you haven’t maxed out your annual contributions to those tax-advantaged retirement accounts, it may make sense to sell your savings bonds and redirect that money.

The interest rate on a Series I savings bond has two components. There’s a variable rate that adjusts every six months based on inflation, and a fixed rate that is locked in at the time of purchase and never changes for the life of the bond. Every I Bond holder receives the same variable rate at any given time. What makes your bond different is the fixed rate.

From May 2020 through October 2022 (the period when most of the I Bond buying occurred), the fixed rate on I Bonds was 0%. If you purchased during that window, your bonds carry a permanent 0% fixed rate, guaranteeing a 0% real, or inflation-adjusted, return. They will keep pace with inflation but never exceed it.

By contrast, I Bonds purchased from November 2022 onward have carried increasingly attractive fixed rates. As of early 2026, the fixed rate on newly purchased I Bonds is 0.90%, and the current composite rate is 4.03%. While 0.90% may sound modest, it’s a permanent 0.90% premium above inflation that compounds for up to 30 years. Over time, that difference adds up.

Note that the interest rates on I Bonds change regularly. The most recent rates can be found on the Treasury Direct website here.

Historically, a diversified portfolio of stocks and bonds has delivered returns well in excess of inflation. If your I Bonds represent money you won’t need for many years, the opportunity cost of holding a guaranteed 0% real return instead of investing in a balanced retirement portfolio becomes significant.

How Do I Bonds Compare to Other Low-Risk Assets?

I Bonds aren’t the only low-risk option available. Here’s how they compare to some common alternatives:

TIPS (Treasury Inflation-Protected Securities): Like I Bonds, TIPS adjust with inflation. However, TIPS trade on the secondary market, introducing price volatility, and they pay interest semi-annually (which is taxable in the year received). By contrast, I Bond interest, compounds and can be tax-deferred until redemption. TIPS may offer a higher real yield, but I Bonds offer simplicity and guaranteed principal stability.

High-yield savings accounts and money market funds: These savings accounts can offer competitive yields. However, those rates will decline the next time interest rates fall, or the Federal Reserve cuts interest rates. The interest is also subject to both federal and state income taxes, whereas I Bond interest is exempt from state and local taxes. In a state with a meaningful income tax, that exemption makes I Bonds more attractive on an after-tax basis.

Short-term bond ETFs and CDs: Certificates of deposit lock in a rate for a set term, but they lack the inflation adjustment that I Bonds provide. Short-term bond ETFs offer liquidity but carry some interest rate risk and are fully taxable. I Bonds are unique in combining inflation protection, tax deferral, and principal safety — no other single product does all three.

The right choice depends on your liquidity needs, tax situation, and expectations for inflation. For most retirees, I Bonds work best as a component of your cash reserves rather than as a core investment holding.

A Great Emergency Fund

I Bonds offer great features for the purpose of acting as your emergency fund.

They’re backed by the full faith and credit of the U.S. government, their redemption value can never decline (even during deflation), the bond interest is exempt from state and local taxes, and they’re easily liquidated through your TreasuryDirect account after the initial 12-month holding period.

The inflation adjustment means your purchasing power is protected even if prices rise, which is something a fixed-rate CD cannot promise. Over the long run, keeping your cash savings in an I Bond can protect your savings from the eroding power of inflation and ensure it maintains its purchasing power.

For retirees who want a safe, inflation-protected place to park their emergency reserves, holding I Bonds long-term remains a reasonable strategy — even if the fixed rate is 0%. The key is understanding the role these bonds play in your portfolio. They are a low-risk savings vehicle, not an investment expected to grow your wealth.

Should I Sell My I Bonds?

With inflation declining from its 2022 peaks and interest rates on other safe assets becoming competitive, many holders are reconsidering whether their I Bonds still deserve a place in their financial plan. Here are some of the most common reasons investors begin thinking about selling:

The composite rate on your I Bonds has dropped below what you could earn in a high-yield savings account, CD, or short-term Treasury bill.

This is a common reason that investors consider selling their I Bonds, but it is not necessarily a reason to sell your I Bonds right away. While it is true that you may be able to get a higher interest rate today with a U.S Treasury bill or high yield savings accounts, you should consider the risks of those other investments.

First, high-yield savings accounts – The danger in cashing out I Bonds for a high-yield savings account is that the interest rate for the savings account is not guaranteed. In fact, banks regularly run specials with temporarily high savings rates to attract inflows of savings. A year later, interest rates are lowered, and you are searching again for another option.

U.S Treasuries and CDs also regularly have interest rates that are higher than I Bonds. However, the risk with Treasuries is that they offer only a fixed interest rate that will not adjust with inflation. If interest rates rise, your I Bonds will see an increase in their yield while Treasuries will stay the same.

 

If you do not have any inflation protection in your investments, it may be worth keeping exposure to I Bonds even if it means giving up a small percentage of yield today.

Your I Bonds carry a 0% fixed rate, meaning you’re only matching inflation, but newer I Bonds offer a higher fixed rate.

If you are holding I Bonds with a 0% fixed rate, and you are confident that I Bonds should continue to be a long-term holding for you, it will likely make sense to sell your current I Bonds and buy new, higher-yielding I Bonds.

There is a breakeven time for this move to make sense that will depend on your tax rate, any penalties for cashing out an I Bond under 5 years, and the current fixed interest rate. But for most, if you plan to hold I Bonds for more than a few years, exchanging I Bonds with a 0% fixed rate makes sense. 

You have higher-priority uses for the money, such as funding Roth IRA contributions, paying down debt, or covering a major expense.

On the other hand, some investors hold onto I Bonds longer than they should, often out of inertia or because they misunderstand the tax treatment. A common misconception is that I Bonds are “tax-free.” They are exempt from state and local income taxes, but the interest is subject to federal income tax when you redeem. Deferring that tax bill indefinitely isn’t always an advantage, however. It can create a larger problem if all the accumulated interest hits your tax return at once.

When Should I Sell My I Bonds?

I Bonds must be held for a minimum of 12 months — you cannot redeem them before that. If you sell within the first five years, you’ll lose the last 3 months of interest as an early redemption penalty. After five years, there is no penalty.

Beyond those baseline rules, here are some strategies for timing your redemption:

Redeem on the first business day of the month. I Bonds accrue interest monthly, and you earn the previous month’s interest on the first day of the new month. If you redeem mid-month or at the end of the month, you’re essentially walking away from interest you’ve nearly earned. Redeeming on the first business day captures the last full month.

Watch your fixed rate reset. If your bonds carry a 0% fixed rate and you’re considering cashing out to purchase new ones at the current 0.90% fixed rate, keep in mind that the annual purchase limit is $10,000 per person. You may need to spread this across multiple years, and the three-month penalty plus the federal tax bill on accumulated interest should both be factored into the math.

Choose a low-income year. Because all accumulated interest is reported as income in the year of redemption, timing matters enormously. If you’re retiring, taking a sabbatical, or expect a lower income for any reason, that’s often the ideal year to redeem. We’ll cover this more in the tax planning section below.

Mind the calendar. A December vs. January redemption can shift the tax hit by an entire year. If adding I Bond interest to this year’s income would push you into a higher bracket or trigger Medicare surcharges, waiting until January puts the income into next year. The value shown in your TreasuryDirect account already reflects any early redemption penalty.

Tax Considerations When Selling I Bonds

This is where retirees need to pay close attention. Most I Bond holders have deferred reporting their interest income, meaning that when you redeem, you’ll owe federal income tax on the entire amount of accumulated interest all at once, in the year of redemption.

I Bond interest is taxed as ordinary income at your marginal federal rate. It is exempt from state and local income taxes. There are no capital gains rates available — every dollar of interest is taxed at ordinary rates.

If you’ve held your bonds for many years, the accumulated interest could be substantial. For someone who purchased $10,000 in I Bonds in 2021 or 2022, the accrued interest by 2026 could be $3,000 or more. For a married couple who each bought the maximum, that’s potentially $6,000+ in additional taxable income landing on a single tax return. That spike can have an impact.

Timing Redemption to Reduce Your Tax Bill

Because the full interest amount hits your tax return in the year of redemption, there’s a meaningful planning opportunity around timing. The ideal approach is to map out your expected income over the next several years and identify the year where adding I Bond interest would result in the lowest marginal tax rate.

For retirees, income can swing meaningfully from year to year depending on the timing of Social Security benefits, required minimum distributions (RMDs), Roth conversions, and investment withdrawals. A year when you’re doing a smaller Roth conversion, or a year before RMDs begin, could be an ideal window to redeem.

Coordinating with Roth conversions: If you’re executing a Roth conversion strategy, the timing of I Bond redemptions matters even more. Both Roth conversion income and I Bond interest flow into the same adjusted gross income calculation. If you’re going to exceed a tax bracket threshold anyway due to a conversion, it may make sense to “stack” your I Bond redemption in the same year. Conversely, if your conversion is carefully calibrated to stay just under a bracket, adding an I Bond income could push you over. This kind of year-by-year coordination is a core part of tax-efficient retirement planning.

Capital loss harvesting: If you have investment losses in your taxable portfolio, you can pair those losses against other income to offset the tax hit from I Bond redemptions. While capital losses directly offset capital gains first, up to $3,000 in net capital losses can be deducted against ordinary income each year, which includes I Bond interest.

The IRMAA Impact — A Hidden Cost for Medicare Recipients

This is a consideration many I Bond holders overlook. If you’re enrolled in Medicare, the interest income from redeeming I Bonds counts toward your modified adjusted gross income (MAGI), which Medicare uses to determine whether you owe an Income-Related Monthly Adjustment Amount (IRMAA) surcharge on your Part B and Part D premiums.

IRMAA operates on a two-year lookback. Your 2026 Medicare premiums are based on your 2024 MAGI. So if you redeemed I Bonds in 2024 and that pushed your MAGI above the relevant threshold — $218,000 for married couples filing jointly or $109,000 for single filers in 2026 — you could find yourself paying hundreds of dollars more per month in Medicare premiums.

The IRMAA brackets are cliff-style, not graduated. Going even $1 over a bracket boundary triggers the full surcharge for that tier, not a prorated amount. At the first tier above the threshold, a married couple would pay approximately $2,300 more per year in combined Part B and Part D surcharges. At the highest tier, the additional cost can exceed $13,000 per year.

Practical tip: Before redeeming I Bonds, project your MAGI for the year, including the bond interest. If you’re close to an IRMAA threshold, consider splitting redemptions across two or more tax years. If you’re already planning to exceed a bracket due to a Roth conversion, that may be the year to stack your I Bond redemption as well — so you only absorb the IRMAA hit for one two-year period instead of two.

Using I Bonds for Education — Potentially Tax Free

There is one scenario where I Bond interest can be completely exempt from federal taxes: if the proceeds are used to pay for qualified educational expenses for you, your spouse, or a dependent. Qualified expenses include tuition and fees at eligible post-secondary institutions, as well as contributions to a 529 college savings plan.

However, there are important restrictions. The bonds must have been issued after 1989, the bond owner must have been at least 24 years old at the time of purchase, and income limits apply. For 2025, the exclusion begins to phase out for joint filers at a modified AGI of $149,250 and is fully eliminated at $179,250. These thresholds are indexed to inflation and adjust annually.

If you file as married filing separately, you are not eligible for the education exclusion. Bonds purchased in a child’s or grandchild’s name also do not qualify — the bond must be registered in the taxpayer’s name.

Leveraging I Bonds as Part of an Education Funding Strategy

For families using 529 plans as their primary college savings vehicle, I Bonds can serve as a useful backup reserve. If 529 assets underperform due to market volatility in the years leading up to college, I Bonds provide a stable, inflation-protected alternative. Timing redemptions to coincide with tuition payments or 529 contributions can maximize the tax-free benefit.

For retirees, this benefit is most relevant if you have grandchildren approaching college age and your income falls within the eligible range. It’s a potentially valuable tax break, but one that requires careful attention to the ownership and income requirements.

Using and Selling I Bonds FAQs

1. Can I sell my I Bonds before one year?

No. I Bonds must be held for a minimum of 12 months from the date of purchase. They cannot be redeemed before that under any circumstances.

2. What is the penalty if I sell before five years?

If you redeem within the first five years, you’ll lose the last 3 months of interest. After five years, there is no penalty. The redemption value shown in your TreasuryDirect account already reflects this penalty.

3. How long do I Bonds earn interest?

I Bonds earn interest for up to 30 years from the date of purchase. After 30 years, they stop earning interest and should be redeemed.

4. Are I Bonds taxed at the state level?

No. I Bond interest is exempt from state and local income taxes. It is subject to federal income tax. This is one of the key advantages I Bonds have over CDs and money market funds.

5. Can I Bonds be used for college expenses?

Yes. If the proceeds are used for qualified educational expenses and you meet the income limits, the interest can be completely exempt from federal taxes. See the education section above for details and restrictions.

6. Do I Bonds have to be held at TreasuryDirect?

Electronic I Bonds are purchased and held exclusively through TreasuryDirect.gov. They cannot be transferred to a brokerage account like Charles Schwab or Fidelity. Paper I Bonds (no longer sold directly) can be cashed at most banks or mailed into TreasuryDirect and deposited into your account.

7. Can I give I Bonds as a gift?

Yes. You can purchase I Bonds as a gift for another person through TreasuryDirect. The gift counts toward the recipient’s annual purchase limit in the year the gift is delivered. Some investors use a “gift box” strategy to buy gifts in advance, lock in today’s rates, and deliver the bonds in future years.

8. Are I Bonds part of my estate?

Yes. I Bonds are included in your taxable estate. When bonds pass to a beneficiary, the accumulated interest may become taxable at that time — an important consideration for bonds with large amounts of deferred interest.

How Do Savings Bonds Fit Into Your Financial Plan?

Whether you should sell your I Bonds is not a simple yes-or-no question. It depends on the fixed rate your bonds carry, the role they play in your overall savings strategy, your current and projected tax situation, and whether you’re on Medicare.

For retirees holding 0% fixed rate I Bonds as an investment, the case for redeeming is strong — especially if the funds can be redirected into a diversified portfolio or used to fund tax-advantaged retirement account contributions. For those using I Bonds as safe, inflation-protected cash reserves, continuing to hold can still make sense.

But regardless of whether you hold or sell, the decision should be made in the context of your complete financial plan. Tax bracket management, Roth conversion strategy, IRMAA avoidance, and estate planning all intersect with the question of when and how to redeem your savings bonds. This is the kind of coordinated, holistic planning that can save retirees thousands of dollars.

We help our clients navigate exactly these kinds of decisions every day. If you’d like to see how we work with clients and what we can do for you, schedule a free introductory meeting with us.