Should I Sell My I Bonds Now? What to Know First

I bonds are a type of security issued by the U.S. Treasury designed to protect investments from inflation. These bonds combine a fixed interest rate with a variable inflation rate, making them an appealing option during periods of rising prices. Deciding whether to sell I bonds involves evaluating financial considerations and understanding the procedural steps.

Key Information About Your I Bonds

You can access information about your I bond holdings by logging into your TreasuryDirect account. The “Current Holdings” or “ManageDirect” section displays details such as the issue date, purchase price, and current value for each bond, though it may not always reflect the last three months of accrued interest if the bond has been held for less than five years.

I bonds earn interest based on a composite rate, which combines a fixed rate set at purchase and an inflation rate that adjusts every six months. This inflation rate is tied to changes in the Consumer Price Index (CPI) and is announced by the Treasury in May and November.

I bonds cannot be redeemed until held for at least 12 months from their issue date. A penalty applies if redeemed before five years. After five years, no penalty is incurred.

Factors for Your Selling Decision

The decision to sell your I bonds should align with your broader financial strategy and current economic conditions. Recent inflation trends and I bond rates are considerations. While I bonds have offered competitive rates during high inflation, a moderation in inflation can lead to lower future earnings.

Your personal liquidity needs play a role. I bonds can serve as a source of funds for unexpected expenses or large planned purchases, such as a home down payment or educational costs. However, I bonds are not as immediately accessible as funds in a traditional savings account due to the minimum holding period.

Evaluating another investment opportunity is important. If funds from selling I bonds could be re-invested into other assets that better support your financial goals, considering this opportunity cost is prudent.

The sale of I bonds should fit within your overall financial planning. This includes evaluating whether the funds could be used more effectively for purposes like paying down high-interest debt or diversifying your investment portfolio.

Tax and Penalty Implications of Selling

If you redeem I bonds within the first five years of their issue date, you will forfeit the last three months of interest earned. For instance, if you sell a bond after 18 months, you will receive interest for only the first 15 months. This penalty is automatically applied during the redemption process.

Interest earned on I bonds is subject to federal income tax in the year the bond is redeemed. Taxpayers generally have the option to defer reporting interest income until the bond matures or is cashed. When you redeem your bonds, the accumulated interest will be included in your gross income for federal tax purposes.

A notable advantage of I bonds is that the interest they earn is exempt from state and local income taxes. This exemption can provide a tax benefit, particularly for individuals in states with high income tax rates. For tax reporting purposes, TreasuryDirect will issue a Form 1099-INT, which details the interest earned and redeemed during the tax year.

The Process of Cashing Out Your I Bonds

Redeeming your electronic I bonds completed through your TreasuryDirect account. Log into your account on the TreasuryDirect website. Navigate to the “ManageDirect” tab, and then select “Redeem securities” under the “Manage My Securities” heading.

On the redemption page, you will choose the type of security you wish to redeem, which will be your Series I savings bond. You can then select the specific I bond or bonds from your holdings that you intend to sell. The system allows you to specify whether you want to redeem the full value of the bond or a partial amount, provided at least $25 remains in the bond.

You will need to confirm the bank account linked to your TreasuryDirect profile, as this is where the redemption proceeds will be deposited. After reviewing all the details of your redemption request, submit it for processing. Following submission, you should receive a confirmation, and the funds typically arrive in your linked bank account within one to two business days, though it can take up to five business days.