Good Idea with light bulb
The new I Bond 1.3% fixed rate looks sexy. Should you sell your 0% fixed rate I bonds and buy new ones? This riveting money information will show you if it is a good idea for you.

Should You Convert Old 0% Fixed Rate I Bonds to New 1.3%

More riveting money information in I Bonds, I have been getting a lot questions about converting 0% fixed rate I bonds to the 1.3% fixed rate recently announced for I bonds.

First of all you can’t convert I Bonds.  You need to sell the existing I Bonds and buy new.

Second, you can’t buy more I Bonds if you have already purchased your limit in the calendar year.  See this blog post on how to purchase more than $10,000 of I Bonds per year.

Third, you can’t cash in your I Bonds until after you have owned the bonds 1 year.

Fourth everyone’s situation and financial goals are unique so there is not a one size fits all answer.  Keep reading to find out the payback period and if this may be a good I Bond play for you.

The fixed rate stays with the bond as long as you own it, up to the 30 year maturity.  If you bought I bonds with a 0% fixed rate, it always stays at 0%.  If you buy I Bonds from November 1, 2023 to April 30, 2024 your I bond fixed rate will always be 1.3% for as long as you own it, up to the 30 year maturity.

I Bonds Interest Rates

The interest rate on I bonds is a combined rate made of a fixed rate and an inflation rate.  The I Bond rates are announced every six months.  The rates change November 1 and May 1 each year.  When the I Bonds you own reset depends on when you purchased them.   The rate changes for the I Bonds you own occur every 6 months from the issue date of your bond.

How Do I Find My I Bonds

Log into your account at treasurydirect,gov

Click on “Current Holdings” on the Top Menu

Treasury Direct menu showing Current Holdings selected on menu
treasurydirect.gov menu

Scroll to the bottom and click the Series I Savings Bonds radio button

Click the “Submit” button

Treasury Direct screen showing Series I savings bonds to select radio button
treasurydirect.gov

It will bring up a table like this showing the issue date, current interest rate, amount, and current value.  If you have owned the I bond for less than five years, the current value has the 3 months interest that you forfeit already figured in. The Treasury Direct website always subtracts the three months interest penalty if you have not owned the I bond for five years.

I bond holdings

So we have I bonds purchased in May 2022 that just had a rate change November 1, 2023. However if we sell this I bond prior to the end of November we will not have received that new 3.94% interest rate yet. You have to own the I bond until the end of the month to earn the interest for that month.

We have I bonds purchased in January 2022 that will have an interest rate change January 1, 2024.

We have I bonds purchased in June 2021 that will have an interest rate change December 1, 2023. You can look up the timing of interest rate changes on the table below available on the Treasury Direct website

Table showing the I bond rate changes for your I bonds every six months from the issue date of your I bond. So January issue date the interest rate changes every Jul 1 and January 1
Timing of I Bond Interest Rate Changes treasurydirect.gov

0% Fixed Rate I Bonds

If you bought, I Bonds from May 1, 2020 to October 31, 2022, you own I Bonds with a 0% fixed rate.

You can look up this table on the Treasury Direct website to see historical data on fixed rates. There are older I bonds with a 0% fixed rate.

I bond fixed rate table showing 0% from May 1, 2020 to May 1, 2022 then 0.4% November 1, 2022 0.9% May 1, 2023 and 1.3% November 1, 2023
from treasurydirect.gov

Payback

If you have owned your I Bonds less than 5 years, you will forfeit three months of interest. For $10,000 of I bonds three months of interest at 3.38% is $84.50. If you buy $10,000 of new I bonds at the current 5.27% combined rate, you receive $43.92 in interest per month for that six month period. That is a two month payback. You will earn the three months interest you lost back in two months at the new rate.

You would want to sell your 3.38% I bonds before the rate is reset to 3.94% so your three month interest penalty is lower. In this case, we would be selling I Bonds earning 3.38% and buying new I bonds earning 5.27%.  In our case the May 1, 2022 I bond just had its rate reset on November 1. So we decide selling and rebuying if right for us, we need to sell this I Bond before the end of November. That way the three months interest we give up will be at the 3.38% rate. For I bond purchases, you don’t earn the interest until the end of the month. Conversely, if you but any time during the month, you will earn the interest at the end of the month. In our case if we sell and rebuy in November, our November interest will be at the higher 5.27% combined interest rate.

Interest Earned

You can see the interest you have earned and get to keep by subtracting the amount from the current value. So in this case the interest is $4,500 for all four bonds.   You will need to pay federal income tax on this interest but not state or local income tax.  There is a possibility of avoiding federal income tax if the I Bond is used for higher education.  See the details here

Using bonds for higher education — TreasuryDirect

Taxes On Interest

The Treasury Direct website shows you the interest you will receive when you cash in your I Bonds.  Here is an estimate of the federal taxes we will pay.

table showing taxes for different interest earned $912 interest 22% = $201, 12% = 109.
Estimated Taxes on I Bond Interest

Treasury Direct does not withhold taxes on your interest.  You can go on the Treasury Direct website in early 2024 to download or print your 1099 form showing the interest.

If I Wait Will I Get the 5.27% ?

If you own 0% fixed rate I bond, if you wait until the next time your I Bond interest rate changes, you will NOT get the current 5.27% composite rate.  Most of us bought I bonds between May 1, 2020 and October 31, 2022 when the fixed rate was 0%. If you have 0% fixed I bonds the fixed rate stays 0% for the life of the bond.  Notice in our example we have an I bond with an issue date of May 1, 2022.  The interest rate for this bond changed on November 1, 2023.  Since this bond has a 0% fixed rate, the new composite rate is 3.94% not 5.27%

The Gift that Keeps Giving 1.3% Fixed Rate

If you cash out the current 0% fixed rate bonds and buy new ones, you will benefit from the higher fixed rate for the entire life of the bond up to 30 years. It is like a gift that keeps giving for 30 years. A 1.3% additional interest rate on a $10,000 investment would give you $14,733 more interest over 30 years.

formula for composite I Bond rate with Nov 1 data. [0.0130 + (2*0.0197) + 90.0130*0.0197) = 0.0527
Nov 1, 2023 composite rate from treasurydirect,gov

So you are getting a little boost from the + (fixed rate * variable rate) of the equation. Since we do not know the future inflation rates, we did not include this last part of the formula in the calculation to get the $14,733 more in interest over 30 years. So you will actually get a little more.

For each $10,000 of I Bonds the 1.3% fixed rate means an extra $130 in interest each year plus that small boost.

A Good Idea, If You Plan on Keeping I Bonds

Given the payback is two months, selling 0% fixed rate and rebuying I bonds would be a good idea for most of us. That assumes you want to still own I bonds. These days you can get over 5% on a CD and other investments.

This is an opportunity to lock in a higher rate for years. Although we don’t have a reliable way to predict what the fixed rate will be when the Treasury adjusts rates May 1 , 2024. The fixed rate could be higher or lower than the 1.3%. The current 1.3% fixed rate looks like a good rate. It has not been this high since May 2007.

Given the variable rate was recently increased you may want to make this decision sooner rather than later, if you have owned your I bonds for less than five years. You could be in a situation where the last three months of interest is lower now than if you wait until next year, The payback is a quick two months when selling at the 3.38% rate and buying at the 5.27% rate.

If you use your I Bonds for your emergency savings, you can’t cash in your new 1.3% fixed rate I bonds for 12 months. Keep in mind, you will need another source of emergency savings during that time or you should not sell and rebuy.

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2 thoughts on “Should You Convert Old 0% Fixed Rate I Bonds to New 1.3%

  1. Great write up MoneyMaven! Thank you.
    Question: Wrt the below statement….
    “In our case if we sell and rebuy in November, our November interest will be at the higher 5.27% combined interest rate.”
    I own several of the 0% fixed rate Ibonds from ’21 & ’22 era and will sell this month and repurchase at the newer higher rate. Now for my question…Is your above statement accurate in that you have not fulfilled your $10k 2023 purchase allotment thus enabling the rebuy? Would I need to wait until Jan 2024 to buy the higher rate Ibonds as I have already fulfilled my 2023 $10k purchase limit.

    1. Yes. If you already fulfilled your $10k purchase limit in 2023, you need to wait until 2024 to purchase I bonds. You could sell I bonds earning 3.38% and put the money into a higher yielding money market until you rebuy in early 2024. If you want to stay in I bonds, you will want to only sell what you can buy again. So $10,000 per account. If you want to learn how to have entity accounts that allow you to purchase more than $10,000 of I bonds each year look at this post. The limit is $10,000 per account.

      Do You Want to Buy More I Bonds than the $10,000 Limit?

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