If you already have an emergency fund parked in a high-yield savings account and you live in a high-tax state, the Treasury just handed you a quiet move. I bonds bought through October pay 4.26% for their first six months, and the interest is exempt from state and local tax. For a Californian, that pencils out ahead of a 4.15% HYSA. For a Texan with no state income tax, it doesn’t.
This isn’t a slam dunk. It used to be.
What just happened
On May 1, Treasury set the I bond composite rate at 4.26% for any bond bought through October 31, 2026. The composite is two rates stacked: a 0.90% fixed rate that stays with the bond for its 30-year life, and a 3.34% annualized inflation rate that resets every six months. Buy now and the 0.90% fixed rate is yours forever, regardless of what Treasury does on November 1.
The fixed rate is the only piece you can really plan around. Anyone who bought during the 9.62% headline rate in 2022 got a 0.00% fixed rate, so they’re earning only the inflation half today and most have cashed out. TIPSwatch calls the current 0.90% fixed rate “a solid fixed rate” because it lets the bond beat inflation by that margin for as long as you hold it.
The inflation half is doing less work than it was. Today’s variable is 3.34%, and the headline is below the best HYSA APYs (top accounts advertise up to 5.00% APY, per Fortune).
So what is the move
Run the after-tax math. I bond interest is exempt from state and local tax. On a $10,000 buy, that exemption is real money in a high-tax state.
For a saver in a high-bracket state like California, New York, or Oregon, the state-tax exemption bumps your effective yield well clear of the 4.26% headline, often into the high 4s. That puts I bonds ahead of the best HYSAs we tracked this week, after tax.
In Texas, Florida, Tennessee, and the other no-income-tax states, there’s no exemption to bank. Top HYSAs beat the 4.26% headline on rate alone and you can pull the money out the same day. Worth shopping the HYSA. Not worth tying up $10,000 for a year to undercut your savings account.
The other tradeoff is liquidity. You can’t cash an I bond for 12 months. Pull it before five years and you forfeit the last three months of interest. A HYSA you can drain at 11 p.m. on a Tuesday.
What to do this week
If you live in a high-tax state and have at least a year before you need the cash, buy up to $10,000 at TreasuryDirect.gov before October 31 to lock the 0.90% fixed rate. Run the math on our savings calculator using the after-tax yield, not the headline rate.
If you live in a no-income-tax state, the move is to keep shopping HYSAs. Our savings hub and the best HYSA rankings refresh weekly. You will likely find a higher-yielding account inside fifteen minutes than I bonds give you, with full liquidity.
If you already own I bonds from 2022 or 2023 with a 0% fixed rate, this is the trade worth considering. Redeem the old bonds (you’re past the one-year lock), pay tax on the accrued interest, and buy new I bonds at the 0.90% fixed. You keep the inflation hedge and add a real yield on top. Do the math first; the three-month interest penalty still bites if you’re inside five years.
File this away if neither situation is you. The fixed rate could rise or fall on November 1. Treasury will tell us on the day.
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