Are I Bonds state tax-free?

Yes. For most investors, I Bond interest is exempt from state and local income tax but subject to federal income tax when the bonds are redeemed or mature. This calculator reflects that by applying only federal tax to the I Bond side.

How does the I Bond early redemption penalty work?

You must hold I Bonds for at least 12 months before you can cash them out at all. If you redeem after 12 months but before five years, you forfeit the last three months of interest as a penalty. The calculator approximates the effect by treating those forfeited months as a proportional reduction in your effective annual rate for the holding period.

Do I Bond rates change over time?

Yes. I Bond composite rates reset every six months based on a combination of a fixed rate and an inflation‑indexed rate. This calculator does not predict future resets; it uses the rate you enter as a simplified average for your holding period. In reality, your realized return could be higher or lower if inflation moves significantly.

How accurate is the CD after-tax yield estimate?

The CD after‑tax calculation assumes interest is fully taxed at your marginal federal and state rates in a taxable account and that you hold the CD to term without early withdrawal penalties. It is a reasonable approximation for many situations, but it does not model year‑by‑year tax timing or bank‑specific penalty schedules.

Should I treat these results as investment advice?

No. This tool is for education and scenario‑testing only. It simplifies taxes, ignores some special rules, and cannot account for your full financial picture. Always review current Treasury and bank disclosures and consider speaking with a qualified financial or tax professional before making investment decisions.

finance calculator

I Bond vs CD Calculator

Compare after-tax effective yields of I Bonds (state tax-free, 3-month penalty if redeemed <5 years) versus taxable CDs to see which pays more.

Results

I Bond after-tax (state-free): 3.27%
I Bond effective rate (after penalty): 2.45%
Penalty months applied: 3.00
CD after-tax yield: 3.61%
Higher after-tax yield: cd

Overview

Series I Savings Bonds (I Bonds) and bank Certificates of Deposit (CDs) are both popular places to park cash, but they behave very differently. I Bonds are issued by the U.S. Treasury, offer a composite rate that adjusts with inflation, and are exempt from state and local income tax. CDs are issued by banks or credit unions, usually pay a fixed rate, and are fully taxable at both the federal and state level. On top of that, I Bonds can trigger a three‑month interest penalty if you redeem them before five years, while CDs often have their own early withdrawal penalties.

How to use this calculator

Find the current I Bond composite rate from Treasury’s published data or a reliable financial source and enter that rate as an annual percentage in the I Bond composite rate field.
Enter the CD yield you are considering. For a fair comparison, choose a CD term that aligns with how long you expect to keep the money invested.
Enter your marginal federal and state income tax rates. The calculator assumes I Bond interest is taxed only at the federal level and CD interest is fully taxable at both levels in a taxable account.
Specify how many months you realistically expect to hold the investment. If that number is below 60 months for I Bonds, the calculator will factor in a three‑month interest penalty (or fewer months if you hold less than three months).
Review the resulting I Bond after‑tax rate, the I Bond effective rate after the penalty, the CD after‑tax yield, and the label indicating which option has the higher estimated after‑tax yield under your assumptions.

Inputs explained

I Bond composite rate (%): The current published I Bond composite rate, expressed as an annual percentage. This rate combines a fixed component and an inflation‑adjusted component and typically changes every six months. Enter the rate you expect to earn over your intended holding period, recognizing that actual future resets may be higher or lower than today’s value.
CD yield (%): The annual percentage yield (APY) or interest rate on the CD you are comparing, assuming it is held in a taxable account. For apples‑to‑apples results, choose a CD term that roughly matches how long you plan to hold your I Bond.
Federal tax rate (%): Your marginal federal income tax rate on interest income. Both I Bond and CD interest are generally taxed as ordinary income at the federal level in taxable accounts. The calculator uses this rate to reduce both I Bond and CD yields for federal taxes.
State tax rate (%): Your marginal state income tax rate on interest income. I Bond interest is typically exempt from state and local income taxes, while CD interest is usually fully taxable. This field affects only the CD side of the comparison in the calculator.
Months held: How long you expect to hold the investment, in months. I Bonds must be held for at least 12 months before you can redeem them, and if you cash out before five years (60 months), you forfeit some interest as an early redemption penalty. The calculator converts the penalty into an adjustment to the I Bond rate so you can compare it to the CD yield over the same holding period.

Outputs explained

I Bond after-tax (state-free): An annualized I Bond rate after applying federal income tax but before any early redemption penalty. This reflects the benefit of state tax exemption compared with a fully taxable bank CD.
I Bond effective rate (after penalty): The I Bond after‑tax rate adjusted for the early redemption penalty if you hold less than five years. The calculator estimates the impact of forfeiting several months of interest by reducing the annual rate in proportion to the penalty months relative to your total holding period.
Penalty months applied: The number of months of interest the calculator treats as forfeited on the I Bond side. For holds under 60 months, this will be up to three months (capped by your actual months held); for holds of five years or more, it will be zero.
CD after-tax yield: The CD’s annual yield after applying both federal and state income taxes based on the rates you entered. This output assumes interest is fully taxable at both levels in a regular taxable account and that you hold the CD to term.
Higher after-tax yield: A simple label indicating which option—“i-bond”, “cd”, or “equal”—has the higher estimated after‑tax yield for the holding period and tax assumptions you provided.

How it works

This I Bond vs CD calculator puts those moving pieces on a comparable, after‑tax basis. You enter an I Bond composite rate, a CD yield, your tax rates, and how long you plan to hold the investment. The calculator then estimates an after‑tax I Bond rate (including the early redemption penalty when applicable), an after‑tax CD rate, and labels which option has the higher effective yield over your chosen holding period.

You supply the current I Bond composite rate as a single annual percentage. This composite rate already reflects both the fixed and inflation components published by Treasury; the calculator treats it as a simple annualized rate for your holding period.

Because I Bonds are exempt from state and local income tax but still subject to federal income tax, the calculator computes an I Bond after‑tax rate as Composite rate × (1 − Federal tax rate). It ignores the timing of when federal tax is actually paid (often at redemption) and focuses on the eventual tax impact on the interest.

I Bonds redeemed before five years lose some interest as an early redemption penalty. The official rule is that you forfeit the last three months of interest if you cash out between 12 and 59 months. The calculator approximates this by translating the forfeited interest into a reduction in your effective annual rate, based on how many months you hold the bond.

In code, we determine how many penalty months apply: if you hold less than 60 months, we use up to three months of penalty interest (capped by your actual holding period), otherwise the penalty is zero. We then reduce the I Bond after‑tax rate proportionally: Effective rate ≈ After‑tax rate × (1 − Penalty months ÷ Months held).

For CDs, we assume the rate you enter is fully taxable at both the federal and state level in a regular taxable account. To approximate the combined tax impact, the calculator applies a standard combined tax factor: CD after‑tax rate ≈ CD yield × (1 − Federal − State + Federal × State), which corresponds to multiplying by one minus your combined marginal rate.

Once we have the penalty‑adjusted I Bond effective rate and the CD after‑tax yield, the calculator compares them and returns a label indicating which option—“i-bond”, “cd”, or “equal”—has the higher estimated after‑tax yield for your holding period.

The goal is not to model every nuance of tax timing or future rate resets, but to give you a clean apples‑to‑apples comparison on a percentage‑yield basis for the time frame you care about.

Formula

I Bond after-tax ≈ I Bond composite rate × (1 − Federal tax rate)
Penalty months = monthsHeld < 60 ? min(3, monthsHeld) : 0
I Bond effective rate ≈ I Bond after-tax × (1 − Penalty months ÷ Months held)
CD after-tax ≈ CD yield × (1 − Federal tax rate − State tax rate + Federal tax rate × State tax rate)

When to use it

Deciding whether to put new savings into I Bonds or into a taxable CD when you are in a high state‑tax bracket and want to understand how state tax exemption affects the comparison.
Evaluating I Bonds for an emergency fund where you might need access to the money before five years and want to see how the early redemption penalty affects the effective yield.
Comparing a short‑term CD ladder against holding I Bonds through several rate reset periods when inflation is elevated and you are worried about the purchasing power of cash.
Running what‑if scenarios to see how changes in federal or state tax brackets influence the relative attractiveness of state tax‑free I Bonds versus fully taxable CDs.
Checking whether a slightly lower‑yielding I Bond might still beat a higher‑yielding CD after you account for state taxes and early redemption penalties on both sides.

Tips & cautions

If you are likely to redeem I Bonds before five years, pay close attention to the I Bond effective rate after penalty—not just the headline composite rate. The penalty can materially reduce the annualized return on short holding periods.
In high state‑tax states, the I Bond’s exemption from state and local income tax can level the playing field or even tilt it in favor of I Bonds, even if the CD shows a superficially higher nominal yield.
Try to compare I Bonds to CDs with similar effective horizons. For example, if you expect to hold cash for about 24 months, compare I Bonds held for 24 months to a 2‑year CD, not to a 6‑month or 5‑year CD.
Remember that I Bond composite rates change over time based on inflation, while CD rates are usually fixed for the term once you lock them in. This calculator does not predict future I Bond resets—it simply uses the rate you input.
Consider also liquidity and access. I Bonds cannot be redeemed at all in the first 12 months, while CDs may allow early withdrawals with bank‑specific penalties. The calculator focuses on yield, not on access to funds in emergencies.
The calculator treats the I Bond composite rate you enter as a single annualized rate over your entire holding period and does not model actual six‑month reset schedules, inflation paths, or the way composite rates change over time.
Federal tax on I Bond interest is typically deferred until redemption or maturity, while CD interest is usually taxed annually. This tool simplifies by treating tax effects as if they apply evenly over the holding period and compares yields rather than detailed tax‑timing cash flows.
CD early withdrawal penalties, which vary by bank and term, are not modeled here. The CD side assumes you hold to term and pay no penalty, so you should factor your bank’s specific penalty policy into any real‑world decision.
Special I Bond rules—such as potential education‑related federal tax exclusions, annual purchase limits, and registration details—are outside the scope of this calculator.
The comparison assumes both investments are held in taxable accounts. CDs held inside IRAs or other tax‑advantaged accounts may face different tax treatment, which this tool does not attempt to capture.

Worked examples

4.3% I Bond, 5.0% CD, 24% fed/5% state, 12 months

Inputs: I Bond composite rate = 4.3%, CD yield = 5.0%, federal tax rate = 24%, state tax rate = 5%, holding period = 12 months.
I Bond after-tax ≈ 4.3% × (1 − 0.24) = 3.27%. Because the bond is held for only 12 months, the calculator applies a 3‑month penalty, reducing the effective rate by roughly 3/12 of the after‑tax yield.
I Bond effective rate ≈ 3.27% × (1 − 3 ÷ 12) ≈ 2.45%. This reflects losing the last three months of interest on a one‑year hold.
CD after-tax ≈ 5.0% × (1 − 0.24 − 0.05 + 0.24 × 0.05) ≈ 3.61% after both federal and state income taxes.
Result: In this scenario, the CD offers a higher after‑tax yield over 12 months than the I Bond once the early redemption penalty is factored in.

5.2% I Bond, 4.7% CD, 32% fed/0% state, 36 months

Inputs: I Bond composite rate = 5.2%, CD yield = 4.7%, federal tax rate = 32%, state tax rate = 0%, holding period = 36 months.
I Bond after-tax ≈ 5.2% × (1 − 0.32) = 3.54%. Because the bond is held for 36 months (less than five years), a 3‑month penalty still applies.
I Bond effective rate ≈ 3.54% × (1 − 3 ÷ 36) ≈ 3.24%, which smooths the impact of the three‑month forfeiture over a three‑year holding period.
CD after-tax ≈ 4.7% × (1 − 0.32 − 0 + 0.32 × 0) ≈ 3.20% after federal income tax (no state tax in this example).
Result: In this scenario, the I Bond’s state tax benefit and higher composite rate slightly edge out the CD’s after‑tax yield over a 36‑month horizon.

Longer hold where the penalty disappears

Consider an investor holding I Bonds for 72 months (6 years) with a composite rate similar to a comparable CD.
Once the holding period reaches five years (60 months) or more, the early redemption penalty for I Bonds no longer applies, so Penalty months = 0.
In that case, the I Bond effective rate equals the I Bond after‑tax rate, and the comparison with a CD is driven mostly by state tax differences and the nominal rates, not by penalties.
Result: For long‑term holds, I Bonds may become relatively more attractive if their composite rate is competitive and you place a value on state tax exemption and inflation linkage.

Deep dive

This I Bond vs CD calculator compares after‑tax yields and incorporates the I Bond early redemption penalty so you can see which option may pay more for your specific holding period.

Enter an I Bond composite rate, CD yield, tax rates, and months held to get a side‑by‑side view of I Bond after‑tax returns versus fully taxable bank CDs.

Ideal for savers in high state‑tax brackets who want to understand how state‑tax‑free I Bonds stack up against taxable CDs when you account for real‑world penalties and taxes.

FAQs

Are I Bonds state tax-free?: Yes. For most investors, I Bond interest is exempt from state and local income tax but subject to federal income tax when the bonds are redeemed or mature. This calculator reflects that by applying only federal tax to the I Bond side.
How does the I Bond early redemption penalty work?: You must hold I Bonds for at least 12 months before you can cash them out at all. If you redeem after 12 months but before five years, you forfeit the last three months of interest as a penalty. The calculator approximates the effect by treating those forfeited months as a proportional reduction in your effective annual rate for the holding period.
Do I Bond rates change over time?: Yes. I Bond composite rates reset every six months based on a combination of a fixed rate and an inflation‑indexed rate. This calculator does not predict future resets; it uses the rate you enter as a simplified average for your holding period. In reality, your realized return could be higher or lower if inflation moves significantly.
How accurate is the CD after-tax yield estimate?: The CD after‑tax calculation assumes interest is fully taxed at your marginal federal and state rates in a taxable account and that you hold the CD to term without early withdrawal penalties. It is a reasonable approximation for many situations, but it does not model year‑by‑year tax timing or bank‑specific penalty schedules.
Should I treat these results as investment advice?: No. This tool is for education and scenario‑testing only. It simplifies taxes, ignores some special rules, and cannot account for your full financial picture. Always review current Treasury and bank disclosures and consider speaking with a qualified financial or tax professional before making investment decisions.

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This I Bond vs CD calculator provides simplified, educational estimates based on the rates and tax assumptions you enter. It does not forecast future I Bond rate resets, CD offers, or inflation, and it does not model all tax rules, penalties, or timing nuances. The results are not investment, tax, or legal advice. Always confirm current terms with Treasury and your financial institutions and consult a qualified professional before making savings or investment decisions.