Want to Dump the I Bonds You Bought Last Year? Here Are Your Options

Last year, a lot of people rushed to buy I bonds on the heels of rampant inflation. Between May and October of 2022, the interest rate on I bonds was 9.62%. That's a pretty generous return.

As a reminder, I bonds don't have a single, preset interest rate. The rate on I bonds resets every six months and is tied to inflation directly.

But right now, I bonds are only paying 4.3% interest. And while that rate will reset in November, you may feel that you no longer want to hold I bonds in your portfolio. If that's the case, you may have options, but it's important to understand the consequences of selling I bonds.

It's a matter of timing

Hopefully, you were made aware before buying I bonds that you're required to hold them for at least a full year before cashing them out. So if you bought your I bonds in November or December, you'll need to sit tight a bit longer before selling them.

If it's been more than a year since you purchased your I bonds, you could sell them now. But you should know that if you cash out I bonds before five years, you'll be penalized to the tune of three months of interest. That penalty, however, may be worth it.

Let's say your home needs major repairs and you don't have the money in your savings account to pay for them. Borrowing rates are way up right now following a string of interest rate hikes on the part of the Federal Reserve. So it might cost you a lot of money to take out a $5,000 home equity or personal loan.

If you have $5,000 in I bonds sitting in a Treasury Direct account (remember, you can't hold these bonds in a regular brokerage account), then it could be worth it to cash them out and access your money, even if it means facing a penalty. This is an option especially worth considering if your credit score is poor and you don't think you'll qualify for a loan, but need money.

If your bonds have been earning 4.3% interest, a three-month penalty on $5,000 is about $54. If you're forced to take out a $5,000 personal loan at 9% interest that takes you five years to pay off, you'll end up spending over $1,200 on interest.

There may be a better investment opportunity for you

Even if you don't need the money you've got tied up in I bonds, you may want to put your investment dollars to better use by loading up on stocks instead. So in that case, taking a penalty and freeing up that cash could be a smart move.

The stock market's return over the past 50 years has been 10%, as measured by the S&P 500 index. Even if the rate on I bonds ticks upward in November when it resets, you're not going to be looking at a return that high. It may be worth it to take a small penalty and invest that money for a more favorable long-term return.

You might also decide to put your money into a savings account, since banks are paying more interest these days. That's worth considering if you think you'll need your money in the next year or so and therefore don't want to invest it.

If you're no longer happy with your decision to buy I bonds last year, know that you're not stuck with them forever. But you may need to wait a bit longer to cash yours out, and expect a penalty regardless of when you bought those bonds in 2022.