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⚖️ I Bonds vs. Bank CDs

How To Compare in 2024

Last Update: Nov 2024

It's a heavyweight prize fight today, with two popular fixed-income options going head-to-head. We'll compare across all the major considerations and end with a visual calculator to help understand the trade-offs.

Disclaimer: it's no secret that the crew here at YourTreasuryDirect loves I Bonds, and that we think they are a great asset to hold for the long term. So it's possible we might be biased. That said, we tried to be as impartial as possible in this comparison guide to help folks find the right answer for their financial journey. Every situation is unique, and (taps sign) this is for informational purposes only and should not be considered financial advice.

Below are 7 key factors to think about when comparing I Bonds with Bank CDs, plus a custom calculator to show how inflation and tax assumptions effect the Real Return of each investment.

Grab a cup of tea, and let's dive in.

Time Horizon

How long are you planning to hold this investment?

Are there any big purchases on the horizon that you might need cash for, such as a house down payment or a car? While CDs and I Bonds are both generally for folks who are able to lock up funds for the short-to-medium term, CDs come in duration as short as 1 month - whereas I Bonds must be held for at least 1 year.

With both CDs and I Bonds, there are some situations where you can cash out earlier than the maturity date, but you'll likely pay a penalty which will cut into your real yield. For CDs, this is usually a few months of interest. For I Bonds, this is 3 months of interest if you cash out before 5 years, and no penalty after 5 years.

Nominal Rates

A key ingredient

CD rates are much more straightforward and predictable than I Bonds rates. For most standard CDs, you know exactly what rate you're getting for the duration of the CD at time of purchase.

I Bond rates (see the latest here) are a bit more complicated, as they adjust every 6 months based on inflation. This makes them less predictable in terms of a nominal rate, but more predictable in terms of real rate (rate adjusted for inflation).

If you bought an I Bond today (November 04, 2024) you would get a fixed rate of 1.2%, and for the first 6 months you'd have a semi-annual inflation of 0.95%, giving an initial nominal rate for the first 6 months of 3.11%.

Try moving the sliders below to see the effect on I Bond rates.

Fixed Rate

1.20%



Semi-Annual Inflation Rate

0.950%
Time HorizonI Bond RateBest CD Rate**National Avg CD Rate**
1 MonthN/A5.41%N/A
3 MonthsN/A5.42%N/A
6 MonthsN/A5.42%N/A
12 Months3.11% * 5.50%1.63%
18 Months3.11% * 5.60%1.38%
24 Months3.11% * 4.75%1.38%
60 Months3.11% 4.60%1.37%

* minus the 3 month penalty for cashing in before the 5 year mark. I Bond Rates Guide for more

** CD Rates are a rough estimate as of August 2023. For up to date CD rates see "Other Resources" at the bottom.

Taxes

Generally speaking, advantages to I Bonds

I BondCD
  • Only taxable as income at Federal level
  • The interest can either be reported annually or deferred until the bond is cashed or has matured
  • Possibility for higher education use tax exemption [1]
  • Taxable as income at State and Local level, as well as Federal
  • If CD is longer than 1 year, tax is due annually on interest earned that year
  • Caveat: a CD bought within a tax-deferred account (like IRA) is treated differently and doesn't have to pay yearly tax

Hassle

Your time is valuable

I Bonds only come in one standard format, and can only be purchased from one seller - the US Treasury. Unfortunately, the Treasury has enjoyed this monopoly and doesn't feel the competitive pressure to provide a user-friendly online experience. Many folks report being confused or frustrated with the official government website. It is also likely to be isolated from the rest of your financial accounts, and yet another username/password to remember (or for your heirs to track down).
CDs, on the other hand, come in a wide variety of flavors (e.g. brokered, no-penalty, many durations). If you want to avoid opening another financial account, your existing bank or credit union probably offers CDs and you can purchase and view them on the same website or app that you already use. However, it's very unlikely that your particular bank offers the highest CD rates at any given moment, and there is usually a wide margin between national average rates and top rates. So, if you want to get the best CD rates you'll have to keep an eye out and manage a variety of accounts. You could avoid this by buying brokered CDs through your brokerage account (e.g. Fidelity or Schwab), but this potentially brings additional fees.

Overall we think it's kind of a wash, but your opinion may differ.

Deposit Size

Cash Commitments: From Modest to Mammoth

I Bonds: minimum of $25, maximum of $10,000 / year per person [source ].

CD: Many CDs have no minimum, but most offer higher rates for largest amounts. There is no strict limit on the maximum amount of money you can invest in CDs, but keep in mind that your deposits are FDIC insured only up to $250,000 per institution. If you are investing more than that, you may want to consider spreading your money across multiple banks [source].

Default Risk

Clarence: "No, we don't use money in Heaven."
George Bailey: "Oh yeah, that's right. I keep forgetting. Comes in pretty handy down here, bub!"

Honestly, both CDs and I Bonds are considered very safe investments and good for folks with low risk tolerance.

CDs issued by FDIC-insured banks are covered up to $250,000 per depositor, per bank. This means that even if the bank were to fail, the FDIC would cover your CD investment up to the insured limit.

CDs issued by credit unions may be insured by the National Credit Union Administration (NCUA), which similarly provides coverage up to $250,000 per member, per credit union.

Even though your deposits are insured, you probably want to avoid the hassle and stress of a bank failure. So it's generally recommended to still look at bank health and ratings before investing. It's tricky, because the banks that are paying the top CD rates are usually the banks most desperate for cash and thus perhaps most at risk for liquidity issues. By only taking out CDs in healthy banks, you're also doing your part to fight moral hazard.


There is always room for a few more in Bank Heaven

I Bonds are backed by the full faith and credit of the U.S. government. Even with the recent credit downgrade, this is about as safe as it gets. If the US defaults on paying out its I Bond obligations, things have significantly deteriorated and it's unlikely the FDIC/NCUA are in a great position either. If you're worried about this scenario, we recommend spending more time on water filtration and canned food.

Expectation of Future Inflation

The future is hazy, but this is a big factor

No one really knows whether inflation is going up, down, or sideways. That said, if you hold opinions here that should have a big effect on the CD vs. I Bond comparison. Simply put, if you think inflation is going up, I Bonds are a better choice because they will adjust automatically to preserve the real return. If you think inflation is going down, CDs are a better choice because you can lock in a higher nominal rate now.

The I Bond inflation adjustment should comfort you in proportion to your trust in the reported CPI-U (e.g. here). It's generally a trusted metric of cost-of-living changes but there are those who think it might not always be accurate.[2]

🧮 I Bond vs Bank CD Calculator

CD Rate (APY)

3.50%

Federal Income Tax

0.00%

State Income Tax

0.00%

Local Income Tax

0.00%

As derived from:

Real Yield APY % = (1+Rn×(1−Rt)1+Ri−1)×100\left( \frac{1 + R_n \times (1 - R_t)}{1 + R_i} - 1 \right) \times 100
[3]

where:

  • RnR_n: Nominal rate (or APY) of the CD or I Bond. For CDs this is the advertised rate, and inclusive of compounding. For I Bonds, this is the composite rate as a function of the announced inflation rate (see more: here)
  • RtR_t: Tax rate. State and Local taxes are exempt from I Bond calculation.
  • RiR_i: Inflation rate (our X axis)


Unpacking the Graph

Assumptions, Limitations, and Observations

Assumptions
  • CD is standard and simple variety. Not callable or bumped-up, and held to duration without penalty.[4]
  • CD rate is already inclusive of compounding. This is usually how banks advertise rates and most CDs compound daily, monthly, or quarterly.
  • CD rate is taxed as ordinary income, not in tax-advantaged account. If you want to simulate a tax-advantaged CD, just be sure to set all taxes to 0%.
  • I Bond rates as purchased today (November 04, 2024) with fixed rate 1.2%. More details on I Bond rates is available on our I Bonds Rate Page.

Limitations:
  • Graph does NOT take into account the 3 month interest penalty for I Bonds under 5 years maturity, nor any early withdrawal CD penalty.
  • The I Bond real yield is calculated at a point-in-time basis. A true I Bond yield could vary up or down based on the delayed adjustment to inflation.

Observations:
  • The relationship between Real Yield APY and Inflation for I Bonds is non-linear at 0. This is due to the fact that I Bond's composite rate takes inflation into account, but it can NOT go below 0, even if inflation is negative.
  • With taxes at 0%, the I Bond real return is basically flat across inflation variation. Inflation protection in action.
  • Taxes really kill the inflation protection of the I Bond. It doesn't take a high income tax bracket to see real returns dip below 0%, which makes sense because you're taxed on ALL your I Bond income before adjusting or inflation. Alas.


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    Footnotes

    1. More details on the education tax exemption for I Bonds see this link from Treasury Direct. ↩
    2. The CPI has faced criticism for not fully reflecting real-world price changes. It tracks prices of a basket of goods, from food to healthcare. Limitations include not accounting for product quality shifts or consumers switching to cheaper alternatives. It emphasizes urban areas, possibly neglecting suburban and rural trends. "Hidden inflation," such as shrinkflation, may bypass CPI calculations. While other inflation indexes exist, the Federal Reserve prioritizes the core Personal Consumption Expenditures Price Index (PCE). One interesting group that is providing an alternative is Truflation ↩
    3. More details on After-Tax Real Rate of Return available at this Investopedia page.
       ↩
    4. "Callable" means the bank can buy back the CD before full tenure. Usually they do this if the rate is expensive for them, which is exactly the time you want it to last full duration. "Bump up" CDs can have a rate adjustment part way through the bond duration. More types: here.
       ↩