I Bonds Now Pay 4.28% -- but You're Better Off Investing in CDs

You'll often hear that there's no such thing as a risk-free investment. But certain investments are virtually risk-free, and I bonds fit the bill there.

I bonds are government-issued bonds whose interest rate is tied to inflation. More specifically, when inflation rises, I bonds start paying more. When inflation cools, the rate on I bonds goes down. 

The interest rate on I bonds resets every six months. And between now and the end of October, you can snag an interest rate of 4.28% on I bonds. 

From there, your rate could adjust upward. But since inflation is expected to continue cooling, a more likely scenario is that your rate will adjust downward.

Some people will argue that a 4.28% return is a pretty good deal on an investment that's virtually risk-free. But CDs may be a better bet for these reasons.

1. You might earn more on your money

As is the case with I bonds, you're taking little risk with CDs with regard to losing some of your principal. If you open a CD at an FDIC-insured bank and limit your deposit to $250,000 (or $500,000 if you have a joint account holder), your money is protected in the event of a bank failure. And the interest rate you lock in on a CD will remain in effect for the duration of its term.

But while 4.28% is a decent interest rate, many short-term CDs today are paying more. At Capital One, for example, you can earn 5.00% on a 12-month CD. An 18-month CD will pay you 4.45%, which is a notch higher than the effective interest rate on I bonds right now.

2. You won't face as many restrictions

If you cash out a CD before it matures, you risk a penalty, the exact amount of which depends on your bank. At Capital One, for example, the penalty is three months' worth of interest for an early withdrawal for CDs with a term of 12 months or less. But the rules surrounding I bonds are even stricter.

For one thing, with CDs, at least you can take your money out early if you need to. With I bonds, you can't access your money for a full year following your purchase. 

Plus, there's a three-month penalty for cashing out I bonds before having held them for five years. That's a really long window. And it's a penalty not worth subjecting yourself to when a CD might require a much shorter-term commitment. 

3. You can put more money into CDs

I bonds have a purchase limit of $10,000 per year. If you're married, that $10,000 limit applies to you and your spouse individually (meaning, in total, you can buy $20,000 worth of I bonds). With a CD, you can technically put in as much money as you want.

Granted, it's not smart to have your CD deposit exceed $250,000 (or $500,000 as a joint account holder) at a single institution, because funds above that level lose FDIC protection. But there's a huge gap between $10,000 and $250,000.

All told, I bonds aren't necessarily a terrible investment today. And for some people, they may be a great fit. But if you're looking for a safer investment with a decent return, then you may want to think about opening a CD before turning to I bonds.