CDs or I Bonds: Where Should I Put My Savings?

By Alexa Serrano Cruz

With the rise in inflation, it’s no surprise that Americans aren’t sure what to do with their money. In fact, 57% of Americans say that inflation has affected their approach to spending and saving, according to Finder’s Consumer Confidence Index. With the Federal Reserve raising savings rates for the tenth consecutive time since 2022, the national savings rate average has reached its highest level since before the Great Recession.

Currently, there is much discussion surrounding when interest rates may decrease. According to most financial experts, rates are expected to plateau for a while and then decrease by the end of 2023. Given this projected outlook, Americans are considering whether they should invest in a CD or I bond — both of which allow consumers to lock in a fixed interest rate.

Here are four things to consider when choosing between a CD or I bond.

1. Interest rates

The U.S. government issues I bonds, and they earn interest for up to 30 years. The interest rate is composed of a fixed rate, which remains the same throughout the bond’s life, and a variable rate, which is adjusted every six months to keep up with inflation.

CDs, on the other hand, are issued by financial institutions and have a fixed rate that lasts for the entire term of your choosing — typically anywhere between three months to five years.

An I bond may have been a viable option when rates were at 6.89% between November 2022 and April 2023, but the interest rate for the next six months, from May to October 2023, has dropped to 4.30%.

Although the national savings average for a six-month CD is currently 1.03%, according to the FDIC, we’ve seen banks offer CD rates of as much as 5% APY. As a result, a CD with a similar duration would be a more profitable investment at this time.

2. Risk

When considering investing in either I bonds or CDs, consumers should keep in mind early withdrawal rules and potential penalty fees.

I bonds and CDs are popular investment options for consumers looking for low-risk investments. However, these investments aren’t as flexible as a savings account, as money is locked away for a set time. If you need to withdraw your money before the investment has matured, you may incur a penalty fee. 

With I bonds, you need to wait at least one year before withdrawing your money to avoid a penalty. If you withdraw your money before five years have passed, you'll lose three months of interest. 

CDs typically allow for withdrawals at any time, but you'll incur a penalty fee for doing so. The penalty fee depends on the bank and the term length, but it usually averages around 90 to 180 days of interest.

3. Inflation

I bonds are investments known to protect against inflation. They do this by adjusting their interest rate every six months based on changes in the Consumer Price Index (CPI). This means that the return on I bonds will keep pace with inflation. 

CDs, on the other hand, offer a fixed rate of return for the entire term. While this rate is guaranteed, it may not keep up with inflation.

I bonds offer better inflation protection than CDs. But it doesn’t always mean consumers will earn a higher return. For instance, the current rate for I bonds is currently 0.7% lower than what you’ll find with a six-month CD.

4. Taxes

The tax treatment of I bonds and CDs is different. I bonds are exempt from state and local taxes, but you’ll owe federal taxes on the interest earned when the bond is redeemed. On the other hand, interest earned on CDs is subject to federal, state and local taxes. As a result, I bonds have a clear tax advantage over CDs. 

Wrap up

Ultimately, choosing between an I bond or CD depends on rates, inflation and your financial goals and situation. 

For consumers interested in opening a CD, it might be worth exploring CD laddering. This strategy involves dividing the intended investment amount between multiple CDs across varying terms, aiming to diversify investments and guard against potential interest rate fluctuations.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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