CD vs. Series I savings bonds
I bonds follow inflation and postpone federal tax until you cash out, while CDs pay a rate you know today. With inflation near 2.8% the fixed rate is ahead for now — but each one guards against the opposite risk.
| Certificate of deposit | Series I savings bond | |
|---|---|---|
| Rate | Fixed and known before you commit | A fixed portion plus an inflation portion reset every six months |
| Purchase limit | None beyond insurance limits | $10,000 per person per calendar year at TreasuryDirect |
| Lockup | The term you choose; a penalty to leave early | No redemption for 12 months; 3 months of interest lost before year five |
| Tax | Federal and state on the interest each year | Federal only, deferred to redemption; exempt from state |
| Inflation protection | None — a rate spike leaves you locked below market | Direct — the rate tracks CPI |
| Best for | Known needs over the next one to five years | Long-horizon savings you want inflation-proofed |
Two instruments guarding against opposite risks
A CD shields you from falling rates; whatever the Fed does, your 4.40% lasts until maturity. An I bond shields you from rising inflation, since its rate is rebuilt every six months out of a small fixed component plus the actual change in CPI. Ask yourself which risk your money cannot absorb. A known bill due in three years fears rate cuts — reinvestment at worse yields — more than it fears inflation, which puts it in CD territory. A pot of long-horizon safety money fears a 1970s-style inflation run quietly halving its purchasing power, which puts it in I bond territory.
On pure yield the comparison currently tilts heavily toward the CD: with CPI near 2.8% and the best CDs near 4.50%, the CD out-earns the I bond by well over a point. But an I bond holder is buying the reset rather than this period’s rate. Should inflation climb back to 5%, the I bond follows it up within six months while the CD holder watches a 4.50% coupon lose the race in real terms.
The constraints that settle it in practice
Three hard rules attach to I bonds, and no yield spread softens them. Redemption is impossible for twelve months — not penalised, impossible — so they are useless for anything you might need inside a year. Redeem before five years and the last three months of interest are forfeited, a mild but real haircut. And TreasuryDirect caps each person at $10,000 per calendar year, which makes them a slow vehicle for large sums: a married couple needs three calendar years to move $60,000 into I bonds.
Tax runs the other way, in the I bond’s favor: the interest is exempt from state tax and federally deferred until redemption — potentially decades of untaxed compounding — and it can be entirely tax-free when used for qualified education expenses within the income limits. To a high-bracket saver in a high-tax state, that package is worth several tenths of a point of equivalent yield.
The sensible combined position
The purchase cap means this is rarely an either/or decision. The pattern that suits most savers: this year’s $10,000 I bond allowance as the permanent inflation hedge at the base of the safety stack, CDs for every dollar with a date attached, and the whole decision revisited each January as the allowance resets. Use the real-return calculator to see what your CD earns after inflation and tax — that figure, not the headline APY, is what the I bond is really competing with.