I Bonds vs. Today's Best CDs: What’s Smarter Right Now? (2024)

How I Bond and CD Rates Work

While both I bonds and certificates of deposit (CDs) are geared toward savings you can leave alone for a while, they have two very different rate structures. I bonds are a variable rate product, which means your earning rate can go up or down, while CDs are fixed-rate products offering a guaranteed, predictable return.

I bond rates are adjusted twice a year based on inflation (hence the name "I bonds"). When you buy a new I bond, you'll receive the advertised rate for the first six months you own it. Then every subsequent six months, your rate will change based on the inflation trend over the previous half year. If inflation has moved higher, the U.S. Treasury will raise your I bond rate. If inflation is instead on a downswing, your I bond rate will fall. Treasury sets the new I bond rate every May 1 and Nov. 1.

CDs are much simpler, as they have one fixed rate that's locked for the full maturity term. So if you open a 5.00% APY certificate with a 3-year term, you're guaranteed to earn 5.00% for all three years. The bank or credit union cannot change your rate for any reason.

Comparing I Bond and CD Rates

I bonds issued between May 1 and Oct. 31 this year will earn an initial 6-month rate of 4.28%. No matter what month you make an I bond purchase during this period, you'll receive that interest rate for your first six months.

After that, it's impossible to know what the next I bond rate will be, much less the rates for every additional future period. On the one hand, the Federal Reserve is strongly focused on bringing inflation further down, making it reasonable to expect the next I bond rate will be lower than today's 4.28%. On the other hand, inflation has been proving very stubborn, so there's no guarantee the Fed will succeed in the short term with further inflation taming. That could leave the I bond rate steady for a while.

We do, of course, know what current CD rates are. Every business day, Investopedia tracks the rates of more than 200 banks and credit unions that offer nationally available CDs to determine our daily ranking of the best nationwide CD rates. Currently, you can earn as much as 6.00% with the top-paying CD in the country. However, that national leader has a relatively short term of 10 months.

Alternatively, you can earn at least 5.00% with CD terms as long as 3 years. Beyond that time frame, you can lock in an upper-4% rate for a term of 4-5 years.

Short-Term Savings Are Better in a CD Right Now

For those who want to sock away cash for the next few years, not decades, today's CDs provide an excellent alternative for two reasons. First, you can earn significantly more right now than the current 4.28% I bond rate. Even if you don't go with the very highest CD rate in a given term and instead pick a top 15 rate, you can still earn notably more than I bonds are paying.

Second, the Fed's determination to bring inflation further down suggests that future I bond rates will move lower than today's 4.28%. But locking in one of today's historically high CD rates means that return will be yours to enjoy for years to come. What the Fed does or doesn't accomplish with inflation won't have any bearing on the CD rate you secure right now.

Long-Haul Savers May Find I Bonds Appealing

I bonds can still be a good fit for anyone who's stockpiling savings for use far into the future, such as in retirement. That's because I bonds are extremely safe and will always earn more than inflation, meaning the future spending power of your cash is continually protected.

Right now, it’s generally expected inflation will drop because the Federal Reserve is committed to bringing inflation down to its target level of 2%. However, the inflation rate has remained sticky in the 3% range for almost a year now, with the Fed's success far from assured.

Of course, financial and economic crystal balls are a thing of fiction, and it’s impossible to know if inflation rates in the U.S. will return to the desired 2% level. As we learned from the pandemic, these things are far from predictable. And that's where I bonds shine: If inflation rises, owners of an I bond will have some protection because their rate will also increase.

Other Considerations for Investing in CDs or I Bonds

I bonds do have a few additional advantages, largely having to do with tax treatment. With CDs, all of the earnings are fully taxable as interest income, at both the federal and state levels. But I bond interest is only federally taxed, so you’ll avoid state taxes.

In addition, I bond holders can choose when to report their interest earnings. It can be year by year on your tax return, or you can defer all of the interest until the year you cash in the bond, which can be up to 30 years from the issue date.

Lastly, if you cash in I bonds to pay for qualified educational expenses, you can also avoid federal tax on the earnings, making it a fully tax-exempt investment. Household income limits do apply, however, making only some families eligible for this benefit.

CDs, for their part, have a different key advantage. Besides removing the guesswork by being entirely predictable, CDs allow you to deposit much larger sums than I bonds allow. Certificates of deposit can be opened with extremely large deposits, such as $250,000 or even more. But I bonds are capped at a much smaller $10,000 per taxpayer per year (or up to $15,000 if you choose to also buy a $5,000 paper I bond with your tax refund).

How We Find the Best Savings and CD Rates

Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer CDs and savings accounts to customers nationwide and determines daily rankings of the top-paying accounts. To qualify for our lists, the institution must be federally insured (FDIC for banks, NCUA for credit unions), and the account's minimum initial deposit must not exceed $25,000. It also cannot specify a maximum deposit amount that's below $5,000.

Banks must be available in at least 40 states to qualify as nationally available. And while some credit unions require you to donate to a specific charity or association to become a member if you don't meet other eligibility criteria (e.g., you don't live in a certain area or work in a certain kind of job), we exclude credit unions whose donation requirement is $40 or more. For more about how we choose the best rates, read our full methodology.