I Bonds Fixed Rate Is Going Up, Time To Sell

TreasuryDirect sets a new fixed rate for Series I Savings Bonds (“I Bonds”) on May 1 and November 1 each year. The fixed rate effective November 1, 2026, goes up from 0.9% to 1.4%. It’s time to sell I Bonds.

Yes, you read that right. It’s time to sell when the fixed rate goes up.

Reasons to Sell I Bonds

First, the higher fixed rate only applies to new I Bonds bought on or after November 1, 2026. The fixed rate on your existing I Bonds is fixed for life. Your existing I Bonds will continue to earn the low fixed rate set on the original purchase date.

Second, a higher fixed rate for new I Bonds means that TIPS yields are high. Observers have noticed that the I Bonds fixed rate is usually set at 65% of the average 5-year TIPS yield in the previous six months. The current 5-year TIPS yield is about 2.5%. All I Bonds purchased since May 2003 (23 years ago!) have a fixed rate of 1.4% or lower. Both I Bonds and TIPS are adjusted for inflation. Why settle for 1.4% when you can have 2.5%?

Third, you can only hold I Bonds in TreasuryDirect unless you have paper bonds. TreasuryDirect doesn’t have adequate staffing for customer service. Anything not readily handled by the automated system requires waiting months. A reader sent some paper bonds to TreasuryDirect to cash out. It’s been seven months, and it’s still not done. She was told it would take at least ten months. No private financial institution can get away with a timeline like that. If I Bonds are only a small part of your investments, you’ll have one fewer account to manage after you sell I Bonds.

Objections

Let me address some potential objections.

I Bonds are more flexible. You can sell at any time without losing principal!

Exactly, and now it’s time to use their flexibility to earn a higher yield in TIPS. If not now, when? Flexibility you don’t exercise loses its value.

TIPS have interest rate risk. You may lose principal if you sell before maturity.

Only looking at losing principal doesn’t give you the full picture. You lose 3 months’ interest when you sell I Bonds within 5 years. You lose 1% or more each year in foregone interest. These are losses you don’t see.

If you sell a 5-year TIPS after three years, you’ve already earned an extra 3%. After you add the 3-month interest penalty from selling I Bonds, the principal loss must exceed 4% to make you worse off, which is unlikely when you have only two years left until maturity.

Moreover, who says you must have a loss if you sell before maturity? You can also have a gain if interest rates go down. If you don’t think you’ll hold for five years, buy one that matches your expected holding period. You still come out ahead with TIPS that mature in two or three years.

Individual TIPS are confusing. I don’t understand the terminology (auction, secondary market, coupon, index ratio, …).

That’s OK. I wrote a book on TIPS, but I use a TIPS mutual fund in my personal portfolio. It’s just as easy to buy a TIPS mutual fund or ETF as to buy any other bond mutual fund or ETF.

Learn how to build a TIPS ladder if that appeals to you, but a TIPS ladder isn’t the only way to invest in TIPS. If you want payouts on a known schedule, you can also buy a set of Term TIPS ETFs. A 2028 TIPS ETF holds TIPS that mature in 2028. It will liquidate and pay out in 2028. A 2031 TIPS ETF holds TIPS that mature in 2031. It will liquidate and pay out in 2031. And so on.

I Bonds are tax-deferred. TIPS are taxable every year.

TIPS are taxable every year only if you hold them in a taxable account. You can buy TIPS in an IRA. Tax-deferred only delays taxes. You’ll pay taxes on I Bonds interest eventually anyway. At current rates, the reduction in interest income (1% or more) represents 20% of deferred interest (about 5%). Tax deferral has some value, but it’s not worth 20%.

I’ll have to pay taxes on all the accrued interest if I sell I Bonds.

See? Tax deferral has become a trap. The longer you hold I Bonds, the deeper you’re trapped. Now you have to figure out how to come out of the trap. You won’t have this problem with TIPS. See “How Much Room for Taxes” below for how to unwind.

I’ll lose three months’ worth of interest if I sell I Bonds within five years.

The size of the interest penalty depends on inflation and the fixed rate on your I Bonds (see the section below for a lookup tool). At the current inflation rate, you make up for the interest penalty in one year or less.

Suppose you bought I Bonds in November 2023 when the fixed rate was 1.3%. The current inflation adjustment is about 3.5% annualized. The 3-month interest penalty is (1.3% + 3.5%) / 12 x 3 = 1.2%. Switching from I Bonds with a 1.3% fixed rate to TIPS that pay 2.5% will make up for the interest penalty in one year. 2.5% – 1.3% = 1.2%. The breakeven will be shorter if your fixed rate is lower.

If your I Bonds are less than one year from their 5-year mark, wait until they cross that line. Otherwise, you’re better off switching.

Look Up Fixed Rate

If you agree it’s time to sell, review your current holdings first. Log in to your TreasuryDirect account. Click on Current Holdings in the top menu. Select “Series I Savings Bonds.”

Note the Issue Date of each bond. Bonds issued within the last 12 months can’t be sold yet. Of the rest, those with the lowest fixed rate are your first candidates to sell. However, TreasuryDirect doesn’t display the fixed rate for your holdings. You can use the lookup tool below to see the fixed rate based on the Issue Date.

Issue month:
Issue year:

How Much Room for Taxes

The difference between Amount and Current Value is the accrued interest.

Selling these two bonds will trigger $1,718.80 in interest income for each bond, or $3,437.60 for both. The interest will be taxed for federal income tax but exempt from state income tax.

If you worry that the interest income may push you into a higher tax bracket, you can use my tax calculator to see your current marginal tax rate and how much room you have in that same rate. You can sell some in 2026 and some in 2027 if you have limited room for taxes. TreasuryDirect allows selling a partial amount from a holding.

Logistics

You’ll need an ID.me account to access TreasuryDirect after October 28, 2026. Make sure the linked bank account is still active (ManageDirect -> “Update my Bank Information”). You don’t want the money to go to the wrong place.

The best time to sell (“redeem”) is at the beginning of a month, right after the 1st, when TreasuryDirect credits interest for the previous month. You can’t schedule your redemption in advance.

You can sell/redeem one bond at a time from Current Holdings, or you can sell/redeem multiple bonds from ManageDirect -> “Redeem securities.”

TreasuryDirect won’t withhold any tax by default. You can set up voluntary tax withholding if you prefer to have them withhold a percentage. See Voluntary Tax Withholding on Selling I Bonds at TreasuryDirect. Either way, remember to log in again next January to get your 1099 form.

Learn the Nuts and Bolts

I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action. Read Reviews

The post I Bonds Fixed Rate Is Going Up, Time to Sell appeared first on The Finance Buff.