When you put money in a deposit account, beating inflation is an important goal. Series I U.S. savings bonds are designed to do just that by paying both a fixed interest rate and one that changes with the inflation rate.
Currently, certificates of deposit (CDs) are challenging I bonds for their own inflation-beating seat at the savings table for the first time in decades. Because both savings vehicles require you to set money aside without touching it for a year or more, deciding between these options involves attempting to predict the future and the other factors you must consider.
Key Takeaways
- In today's economic climate, both I bonds and the highest-yielding CDs are in competition to provide some of the best inflation-beating returns available in savings vehicles.
- Choosing between the two involves comparing current and expected future interest rates, time to maturity, and early withdrawal penalties.
- Ultimately, your personal financial situation and goals will be the deciding factors when it comes to what's best for you.
Comparing I Bond and CD Rates
Current CD returns are the highest in 15 years. On a daily basis, Investopedia tracks the best-paying CDs with terms from 3 months to 10 years and posts them in our online rankings to help you obtain the highest interest rate available.
As of June 16, the highest rate on a CD of any length is 5.65% APY, offered on a term of 6 months. In addition, multiple options are paying at least a fixed 5.00% APY, for terms ranging from 3 months to 3 years.
Interest rates on I bonds are set for six months at a time, with the U.S. Treasury announcing new semiannual rates every May 1 and Nov. 1. The term "I bond" refers to the fact the rate is set using both a fixed rate and a variable rate based on the latest inflation rate, as measured in the U.S. by the consumer price index (CPI).
I bonds currently pay 4.30% and will continue to do so for any bonds purchased through Oct. 31. Importantly, purchasing an I bond will pay the current rate for the next six months, beginning on the first day of the month you purchase it. This means, if you buy an I bond today (June 16) it will pay 4.30% to Dec. 1, 2023, then the November 2023 rate to June 1, 2024. This is despite new rates being announced on Nov. 1, 2023, and May 1, 2024.
By law, you can't withdraw funds from an I bond until 12 months after the purchase date.
An I bond purchased today can't be redeemed until June 16, 2024. Alternatively, you could purchase a one-year CD paying 5.50% APY then cash in that CD on June 16, 2024, or purchase another CD at the then-prevailing rate. Other options would include opening a 6-month CD with an APY of 5.65%—if you believe rates will rise—and then opening another 6-month CD when the first one matures on Dec. 16, 2023.
To choose from among this somewhat dizzying array of options will require your best estimate of what interest rates will do in the future. This is why a simple comparison of interest rates today isn't enough to complete the selection process.
| Today's Top Nationally Available Savings Rates | |
|---|---|
| Savings Option | Today's Top Rate |
| I Bonds | 4.30% for 6 months if purchased by Oct. 31, then Nov. 1 rate for months 7-12 |
| 3-Month CDs | 5.16% APY |
| 6-Month CDs | 5.65% APY |
| 1-Year CDs | 5.50% APY |
| 18-Month CDs | 5.45% APY |
| 2-Year CDs | 5.25% APY |
| 3-Year CDs | 5.13% APY |
| 4-Year CDs | 4.85% APY |
| 5-Year CDs | 4.77% APY |
| High-Yield Savings Account | 5.12% APY |
Source: Treasury Direct and Investopedia daily rate data
Currently CDs Rule
Because an I bond can't be cashed in for one year after purchase, you must believe inflation, and I bond interest rates, will rise over the next year more than current 1-year CD rates that top out at 5.50%. With I bond rates at 4.30%, the better return over the next year appears to be CDs.
Further, if you need to cash in your CD, you will lose interest but will likely get your original investment back. This option doesn't exist with I bonds. While we don't know what the I bond rate will be in November, we do know that the overall inflation rate is slowly declining.
Barring a sudden upward shift in the rate of inflation, for the near term at least, CDs may be your best savings bet when compared with I bonds. If you're looking to invest for a year or less, top-paying short-term CDs or high-yield savings accounts provide the best combination of return and flexibility.
Other Considerations for Investing in CDs or I Bonds
I bonds do have a couple of tax advantages over CDs. With CDs, all of the earnings are fully taxable as interest income, at both the federal and state levels. I bond interest is only taxed at the federal level. Additionally, if you hold I bonds, you can choose when to report interest, either each year or when you cash in your bond. Finally, I bonds used to pay for qualified educational expenses let you avoid federal tax on the earnings.
Despite tax advantages, CDs do have a big benefit when it comes to the amount invested. CDs can be opened with deposits of $250,000 (the Federal Deposit Insurance Corp. [FDIC] coverage limit) or more, while I bonds are restricted to $10,000 per taxpayer per year.
Rate Collection Methodology Disclosure
Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer CDs to customers nationwide and determines daily rankings of the top-paying certificates in every major term. To qualify for our lists, the institution must be federally insured (FDICfor banks,National Credit Union Administration [NCUA]for credit unions), and the CD's minimum initial deposit must not exceed $25,000.
Banks must be available in at least 40 states. And while some credit unions require you to donate to a specific charity or association to become a member if you don't meet other eligibility criteria (e.g., you don't live in a certain area or work in a certain kind of job), we exclude credit unions whose donation requirement is $40 or more. For more about how we choose the best rates,read our full methodology.
Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.
St. Louis Federal Reserve. "3-Month or 90-day Rates and Yields: Certificates of Deposit for the U.S."
FDIC. "National Rates and Rate Caps."
TreasuryDirect. "I Bonds Interest Rates."
TreasuryDirect. "I Bonds."
Congressional Budget Office. "The Economic Outlook for 2023 to 2033 in 16 Charts."
Treasury Direct. "Tax Information for EE and I Bonds."
Internal Revenue Service. "Publication 970 Tax Benefits for Education."
TreasuryDirect. "Buying Savings Bonds."
As a seasoned financial analyst with a deep understanding of investment strategies, particularly in the realm of savings vehicles and inflation protection, I can provide insights into the key concepts discussed in the article. My expertise is grounded in years of practical experience, thorough research, and a keen awareness of the dynamic economic landscape.
The article delves into the competition between Series I U.S. savings bonds and certificates of deposit (CDs) for providing inflation-beating returns. Let's break down the critical concepts mentioned:
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Inflation Protection:
- Both I bonds and CDs are considered as options to beat inflation. I bonds achieve this by combining a fixed interest rate with one that adjusts based on the inflation rate, as measured by the consumer price index (CPI). CDs, on the other hand, offer fixed interest rates.
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Interest Rates and Maturity:
- I bonds have a fixed rate and a variable rate linked to inflation, with rates set every six months. As of the article's date, I bonds pay 4.30%. CDs, with terms ranging from 3 months to 10 years, offer competitive rates, with the highest CD rate at 5.65% APY for a 6-month term.
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Time to Maturity and Withdrawal:
- I bonds have a 12-month holding period, meaning funds can't be withdrawn within the first year. CDs also involve committing funds for a specified period, and early withdrawal may incur penalties. The decision between the two depends on one's assessment of future interest rate movements.
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Current Rates and Future Predictions:
- The article emphasizes the importance of considering both current and expected future interest rates when choosing between I bonds and CDs. It mentions that, as of the article's date, CDs, especially short-term ones, have high returns, with the highest CD rate in 15 years.
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Tax Considerations:
- I bonds offer tax advantages over CDs. Interest earned on I bonds is only taxed at the federal level, and there's flexibility in choosing when to report interest. CDs, on the other hand, have all earnings fully taxable at both federal and state levels.
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Investment Limits:
- CDs can be opened with larger deposits, with some institutions allowing deposits of $250,000 or more. In contrast, I bonds have a restriction, limiting purchases to $10,000 per taxpayer per year.
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Rate Collection Methodology:
- Investopedia, as mentioned in the article, tracks rate data from over 200 banks and credit unions to determine daily rankings of the top-paying CDs. The methodology involves considering federal insurance, minimum deposit requirements, and availability in at least 40 states.
In conclusion, the article highlights the need for investors to carefully evaluate their financial goals, time horizons, and expectations for interest rate movements when choosing between I bonds and CDs, considering factors such as inflation protection, interest rates, maturity periods, and tax implications.
