Ask Yourself These Questions Before Redeeming I Bonds

Last year, many people rushed to buy I bonds as inflation surged. I bonds are government-backed bonds whose interest rate is tied to the rate of inflation. And given that inflation was a massive problem for consumers last year, 2022 was actually a pretty good time to load up on these bonds because they were paying quite generously.

Not only that, but I bonds are virtually risk free because they're guaranteed by the U.S. government. If you buy stocks in a brokerage account, by contrast, you risk losing money if market conditions sour.

But you may be reaching the point where you're tired of having your cash locked away in I bonds and want access to that money. If so, and you're thinking of redeeming your I bonds, be sure to run through these key questions first.

1. Have I held my bonds for a full year yet?

If you bought your I bonds less than 12 months ago and want to redeem them, well, sorry -- you can't. You must hold your I bonds for a complete year before redeeming them is even an option.

If you're not sure when you purchased your I bonds, log into your Treasury Direct account (which is likely how you bought those bonds in the first place) to look at the date. You can also try looking at your linked checking account to see when the money for your I bond purchase was debited.

2. Have I held my bonds for five years?

Once you've held your I bonds for a full year, redeeming them is possible. But you should know that you'll face a penalty for redeeming I bonds before having held them for five years. Specifically, your penalty will amount to three months' worth of interest on those bonds, which is money you may not wish to give up.

3. What am I going to do with the money?

It's one thing to redeem your I bonds and invest your cash in something more lucrative. But if you're pulling that money out to spend on a vacation, you may want to think twice.

Right now, I bonds are paying 4.3% interest through October. That's not too shabby for a government-backed investment, and it's comparable to what many certificates of deposit are paying right now.

However, you may decide that you're not happy with a 4.3% return. If so, and you've held your I bonds for at least five years, it could make sense to redeem them, take the money, and use it on what could be a more lucrative investment.

As an example, the S&P 500 index has delivered an average annual return of 10% before inflation over the past 50 years. If you were to redeem your I bonds and buy shares of an S&P 500 ETF, you might score a much higher return on your cash.

Redeeming I bonds is not necessarily a bad idea under certain circumstances. But run through these questions first so you don't end up making a costly mistake.