Comparing I Bonds and CDs for Smart Long-Term Savings Strategies

The Series I savings bond, backed by the U.S. government, currently offers a 3.98% interest rate from May 1 through October 31, 2025. Designed to protect investors from inflation, I bonds combine a fixed rate set at purchase with a variable rate adjusted every six months based on inflation metrics. This makes them a compelling option for conservative investors focused on long-term savings goals.

While I bonds once reached rates as high as 9.62% during peak inflation periods, cooling inflation has made some certificates of deposit (CDs) more attractive, with yields exceeding 4%. Both I bonds and CDs offer guaranteed returns and low risk, but they differ significantly in terms of liquidity, tax treatment, purchase limits, and how interest rates are applied.

Key Features of I Bonds

• Government-backed with combined fixed and inflation-adjusted rates
• Minimum purchase of $25, with a maximum annual purchase limit of $10,000 per person
• Interest compounds monthly and adjusts every six months based on inflation
• Must be held for at least one year; withdrawing before five years results in a penalty of three months' interest
• Exempt from state and local taxes; federal taxes apply but can be deferred until redemption

Comparing I Bonds with Certificates of Deposit

CDs are fixed-rate deposits offered by banks and credit unions, with terms ranging from a few months to five years. Unlike I bonds, CD interest rates remain constant throughout the term, providing predictable returns. CDs generally allow larger investments without annual purchase limits and often offer more flexible term options to suit short- or medium-term financial goals.

Early withdrawal penalties vary by CD type, but some no-penalty CDs exist. CDs are insured by FDIC or NCUA up to $250,000, whereas I bonds are backed by the full faith and credit of the U.S. government. Taxation on CD interest includes state and federal income taxes, unlike I bonds which are exempt from state and local taxes.

When to Choose I Bonds

• You want to protect your savings from inflation over the long term.
• You have a smaller amount to invest and want to start with as little as $25.
• You can commit to keeping your money invested for at least five years to avoid penalties.
• You seek tax advantages, especially if using earnings for qualified education expenses.

When to Choose CDs

• You need access to your funds within a short to medium timeframe.
• You prefer a fixed, predictable interest rate locked in for the term.
• You want to invest a larger sum without annual purchase limits.
• You seek the highest fixed rates currently available in the market.

Both I bonds and CDs serve as conservative, low-risk investment vehicles. Choosing between them depends on your investment horizon, liquidity needs, amount to invest, and desire for inflation protection or fixed returns. Diversifying across these options can also help balance flexibility and growth potential.

Alternative Low-Risk Savings Options

For emergency funds requiring liquidity, neither I bonds nor CDs are ideal due to withdrawal restrictions. High-yield savings accounts and money market accounts offer more accessible options while still providing competitive interest rates. Combining these with I bonds and CDs can create a balanced savings strategy tailored to both short- and long-term financial goals.