What is the best investment right now?

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When you put money in a deposit account, fighting inflation is an important goal. Series I US Savings Bonds are designed to do just that by paying both a fixed interest rate and one that changes with the rate of inflation.

Currently, certificates of deposit (CDs) are challenging I bonds for their own inflation-fighting seat at the savings table for the first time in decades. Because both savings vehicles require you to set money aside untouched for a year or more, Deciding between these options involves trying to predict the future and other factors you need to consider.

Key points to remember

  • In today’s economic climate, top-performing I bonds and CDs are competing to provide some of the best inflation-fighting 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 in determining what is best for you.

Comparison of I Bond and CD rates

Current CD yields are the highest in 15 years. Every day, Investopedia tracks the highest paying CDs with terms ranging from 3 months to 10 years and posts them to our online rankings to help you get 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 6-month term. Additionally, several options pay 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 US Treasury announcing new semi-annual rates every May 1 and November 1. The term “bond I” refers to the fact that the rate is fixed at both a fixed rate and a variable rate based on the latest rate of inflation, as measured in the United States by the consumer price index (CPI).

I bonds currently pay 4.30% and will continue to do so for all bonds purchased through October 31. It is important to note that buying an I bond will pay the current rate for the next six months, starting on the first day of the month you buy it. This means that if you buy an I bond today (June 16), it will pay 4.30% until December 1, 2023, and then the November 2023 rate until June 1, 2024. This despite the announcement of new rates on November 1, 2023. , and May 1, 2024.

By law, you cannot withdraw funds from an I bond until 12 months after the date of purchase.

An I bond purchased today cannot be redeemed until June 16, 2024. Alternatively, you can purchase a one-year CD paying 5.50% APY and then redeem that CD on June 16, 2024, or purchase another CD at prices then in effect. rate. Other options include opening a 6-month CD with an APY of 5.65% – if you think rates will go up – then opening another 6-month CD when the first comes in. maturity on December 16, 2023.

To choose from this somewhat dizzying array of options, you’ll need your best estimate of what interest rates will do in the future. This is why a simple comparison of interest rates today is not enough to complete the selection process.

Source: Daily rate data from Treasury Direct and Investopedia

Current CD Rule

Because an I bond cannot be cashed in for a year after purchase, you have to believe that inflation and I bond interest rates will rise over the next year more than current CD rates at 1 year capped at 5.50%. With I bond yields at 4.30%, the best performer over the next year appears to be CDs.

Also, if you need to cash in your CD, you’ll lose interest, but you’ll likely get your original investment back. This option does not exist with I bonds. Although 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 change in the rate of inflation, in the short term at least, CDs may be your best savings bet over I bonds. If you’re looking to invest for a year or less, CDs Higher-paying short-term CDs or high-yield savings accounts offer the best combination of return and flexibility.

Other considerations for investing in CDs or I Bonds

I bonds have some tax advantages over CDs. With CDs, all income is fully taxable as interest income at both the federal and state levels. Interest on bonds is only taxed at the federal level. Additionally, if you hold I Bonds, you can choose when to report interest, either annually or when you redeem your bond. Finally, I bonds used to pay for eligible education expenses allow you to avoid federal income tax.

Despite the tax advantages, CDs have a big advantage in terms of 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 limited to $10,000 per taxpayer per year.

Disclosure of rate collection methodology

Each business day, Investopedia tracks rate data from more than 200 banks and credit unions that offer CDs to customers nationwide and determines the daily ranking of the highest-paying certificates for each major term. To be eligible for our listings, the institution must be federally insured (FDIC for banks, National Credit Union Administration [NCUA] for credit unions), and the minimum initial CD 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 do not hold a certain type of employment), we exclude credit unions with a donation requirement of $40 or more. To learn more about how we choose the best rates, read our full methodology.

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