How, why, and when to rollover I bonds

Friday, November 3rd, 2006
Categorized as: Series I US Savings Bonds

Series I Savings Bonds have an interesting feature – the Treasury guarantees you a fixed base-rate for 30 years, but you only have to guarantee that you’ll hold an I bond for one year. When the fixed base-rate on new I bonds goes up, this feature allows you to roll your low base-rate I bonds into better ones.

How to rollover I bonds

There’s nothing special about rolling over I bonds. You redeem your old bonds and you invest in new ones.

However, as you can see in the following table, with the I bond fixed-base rate at just 1.4%, only I bonds issued in the last three and half years are suitable for rolling over now. Older I bonds already have better rates.


Series I Savings Bond fixed base-rates

Issue Date Fixed Rate
Sep 98 – Apr 03 1.60% – 3.60%
May 03 – Oct 03 1.10%
Nov 03 – Apr 04 1.10%
May 04 – Oct 04 1.00%
Nov 04 – Apr 05 1.00%
May 05 – Oct 05 1.20%
Nov 05 – Apr 06 1.00%
May 06 – Oct 06 1.40%
Nov 06 – May 07 1.40%

One thing you have to keep in mind is that when you buy new I bonds, there’s a maximum annual investment limit of $30,000 per Social Security Number per year (this limit was reduced to $5,000 as of Jan 1, 2008). Paper I bonds and electronic I bonds at TreasuryDirect have separate limits, so you can invest $30,000 in each type for a total of $60,000 per SSN (now $5,000 for a total of $10,000).

If you have a lot of bonds to rollover, these purchase limits can prevent you from rolling them all over or they can prevent you from making additional investments. The limits are per calendar year, so if this is a concern, keep in mind that you can roll some over before the end of the year and the rest after January 1.

Why to rollover I bonds

What you gain when you rollover I bonds is a higher fixed base-rate. This means you’ll earn more interest every year from now on. For example, switching from 1.0% base-rate I bonds to 1.4% earns you an extra $4 a year per $1,000 of investment.

Since all of the I bonds suitable for rollover were issued less than five years ago, what you’ll lose when you do a rollover is an early-redemption penalty of the most recent three months interest.

But if your I bonds have been earning an inflation component of 1.00% for at least three months, the penalty on a 1.0% base-rate bond is just $5.00 per $1,000 of investment.

Redemption of your old bonds also means you’ll lose the tax-deferred status on the interest they’ve earned so far. Tax-deferment is a serious issue for many Savings Bond investors. Whether a rollover is worth it depends to some degree on what your tax rate is now compared to what it will be when you’d otherwise cash your I bonds.

If the tax-deferment doesn’t make any difference to you, you can earn $4 more per year for a one-time cost of $5. Obviously if you intend to hold on to your I bonds, a rollover can make sense, depending on how large your I bond investment is.

When to rollover I bonds

However, you have to minimize your penalty by redeeming after three low-interest months. The problem is that most I bond investors don’t understand when the interest rate on their bonds changes.

I bond interest rates are adjusted every six months beginning in the month in which the bond was issued. For example, this means that if you have I bonds that were issued in October and November, their rates change in different months. Most people think all I bond rates change at the same time, but it’s a lot more complicated than that!

An October I bond changes rates in April and October. Since new inflation components are announced one month later, in May and November, these updates get the inflation component announced five months earlier (which is based on the inflation that occured during the six months before that).

I bonds issued in October – or in April – just started earning the low 1.00% inflation component last month. You want to hold on to these until January so that you give up the low interest rate earned in Oct-Nov-Dec as your penalty. If you rollover now you’ll give up Aug-Sep-Oct interest, and two of those months earned an inflation component of 5.69%. Your penalty would be about $12.87 per $1,000 of investment.

The following table tells you when to rollover I bonds to minimize the penalty.


Don’t roll over I bonds before these dates!

Issue month Don’t rollover before
Jan or Jul ok now
Feb or Aug ok now
Mar or Sep Dec 2006
Apr or Oct Jan 2007
May or Nov ok now
Jun or Dec ok now

There will be a lot more joy in rolling over I bonds when the fixed base-rate gets back to 3.0% or higher. At the current 1.4% level, it’s worth doing, but just barely.

For example, if your entire investment is one $500 I bond, rolling from a 1.0% fixed rate to 1.4% will earn you just an extra $2 a year.

Depending on the size of your investment, you could spend more in gas driving to the bank than a rollover will gain you. And don’t forget there’s a transaction processing cost that the Treasury has to pay on both your redemption and your purchase.

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FDIC Insured Certificates of Deposit can pay 1 or 2% more than savings bonds when held for a similar length of time. See top CD Rates Below:


On November 3rd, 2006 Mario said:

Tom, thanks for the interesting analysis, i.e. only $5 loss for $4 annual gain. So (without tax consequences) it almost makes sense to do this even if you think you might switch again to a higher I bond rate after perhaps a year and a half.

But here is the million dollar question (I know it’s very hard to answer, all I want is your opinion really), where might fixed rates be headed in the future (i.e. next several years)? This is really a two part question … (1) Where are real interest rates headed, for example TIPS yields, and (2) what might prompt the Treasury to stop widening the gap between I bond and TIPS yields? In my understanding we are still at a fairly low level of real interest rates right now as compared to the last decade.

On November 4th, 2006 Tom Adams said:

Mario – according to Standard & Poor’s, which provides investors with ratings for government bonds around the world, 60% of the variability in inflation-indexed bond rates is linked to the credit-worthiness of the government issuing the bonds. I wrote about this report on August 3 – S&P report says yields on inflation bonds track national credit ratings.

So asking for the rates to go up is kind of a two-edged sword. Yes, you earn more, but you take more risk, too.

As it happens, on June 28 I reported that S&P had recently said that the US credit rating could drop within 10 years. Put those two reports together and you see higher TIPS rates.

In the short term, however, TIPS rates are more complicated than that. For example, right now the rates are inverted; 5-year TIPS pay more than 10- or 20-year TIPS. From a credit-rating perspective, this makes no sense at all. But that’s where supply and demand is causing the rates to settle right now.

In regard to your second question, I think a case can be made that the Treasury hasn’t “widened the gap” between I bonds and TIPS, if you look specifically at 10-year TIPS rates.

As you can see in the table near the bottom of my Series I Savings Bond fixed base rates post, the gap is typically about 100 basis points, although in certain situations the Treasury has temporarily narrowed it.

On December 18th, 2006 bobby said:

I have a bond with a Jan issue date. If I cash it now, I lose Dec, Nov and Oct (3 months @ 2%). If I wait until Jan to cash it, I gain Jan int (4%), and then lose Jan(4%), Dec(2%), and Nov(2%).
Is that correct? This would imply its better to cash in Jan due to extra month int.

On December 18th, 2006 Tom Adams said:

Bobby – your calculations are off. You don’t earn interest for a month on the first of that month, but on the first of the next month.

So you’d have to wait until February before January’s interest would become a factor.

That said, you are correct that the longer you wait to cash your bond, the more valuable it will be.

On February 5th, 2009 THERESA said:

Can I claim interest on my income tax on bonds without cashing them

On February 6th, 2009 Tom Adams said:

Theresa – the info you’re looking for is here.

Tom Adams

On August 5th, 2009 Rick S said:


Do you know how Treasury Direct reports a partial I-bond redemption on the INT-1099 in terms of interest and principal? For example, is the redeemed money considered a return of interest first (as is done with partial redemptions from tax-deferred annuities) or as an interest-to-principal ratio?

On August 6th, 2009 Tom Adams said:

Rick – my assumption is they prorate it (use the ratio) but I don’t know that for sure.

My assumption is based on how they would have to do it if these were paper I bonds and you did a partial redemption. They would essentially treat it as if you had gotten two smaller bonds to begin with and you were cashing one of them.

Tom Adams

On October 23rd, 2009 Kurt Hollabaugh said:

Hi Tom:
Is the information in this article still relevant, and might this be a good time (after Nov.2 – assuming an increased fixed rate for the next 6 months) to roll over some of the I bonds from the last 18 months of low fixed rates? Depending, of course, on whether or not each bond has earned 0 interest the past 3 months.
Thanks in advance,

On October 23rd, 2009 Tom Adams said:

Kurt – the I bond fixed rate to be announced on Nov 1 2009 is unlikely to be high enough to roll anything into, but if it is I’ll have another post like this one.

This post is about a situation that occurred three years ago and at this point, of course, is of only historical interest.

Tom Adams

Comments Closed

June 1, 2010

After six years, over 400 posts, 3,680 real comments, and over 90,000 spam comments (thank you, Akismet, for making managing a blog with comments possible), I am closing public comments on I will contine to update the main articles on this site, but not the comments.

Virtually every question about Savings Bonds has been asked and answered on this site multiple times. Use the search feature (see the box in the gray area near the top of this page) or the detailed menu on the lower part of the home page to find the information you're looking for. If you have a copy of Savings Bond Advisor, you can ask me a question here.

Tom Adams

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