Are Series I savings bonds taxed by states and localities?

No. I Bond interest is exempt from state and local income taxes, but it is subject to federal income tax when you redeem the bond or it matures (unless you qualify for certain education tax exclusions).

How long do I need to hold I Bonds before I can redeem them?

I Bonds cannot be redeemed in the first 12 months. If you redeem them within the first five years, you forfeit the last three months of interest as a penalty. After five years, you can redeem without penalty up to the 30‑year maturity.

Do bank CDs always have early withdrawal penalties?

Most bank CDs charge early withdrawal penalties if you break the term, often measured in months of interest. Brokered CDs can be sold in secondary markets instead of being broken, but their price can move up or down with interest rates. This calculator focuses on after‑tax yields, not penalties or market price risk.

Does this calculator model future changes in I Bond or CD rates?

No. It shows a snapshot using the current I Bond composite rate and CD APY you enter. I Bond variable rates reset every six months based on inflation, and CD rates are typically fixed for the term. For multi‑year comparisons, you may want to rerun the calculator when rates change.

What about special I Bond tax benefits for education?

This tool does not include the education tax exclusion, which allows some taxpayers to exclude I Bond interest from federal tax when used for qualified higher‑education expenses under strict rules. If you think you may qualify, treat this comparison as conservative for I Bonds and discuss details with a tax professional.

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I Bond vs CD After-Tax Calculator

Compare after-tax yields of Series I savings bonds vs CDs with federal/state tax differences.

Results

I Bond after-tax APY (%): 342.00%
CD after-tax APY (%): 355.00%
I Bond minus CD (percentage points): -13.00%

Overview

When cash yields are competitive, it’s natural to compare Series I savings bonds to high‑yield CDs. On the surface you see two headline rates, but the after‑tax reality looks different because I Bonds are exempt from state and local tax while CD interest is generally taxed at both federal and state levels. The result: a lower‑rate I Bond can sometimes beat a higher‑rate CD once taxes are considered.

This I Bond vs CD after‑tax calculator lets you quantify that comparison quickly. You enter an I Bond composite rate, a CD APY, and your marginal federal and state tax rates. The tool computes after‑tax yields for each and shows which option comes out ahead on an annualized, after‑tax basis, helping you decide where to park savings under your own tax situation.

How to use this calculator

Enter the I Bond composite rate (%) you are considering, combining its fixed and inflation components.
Enter the CD APY (%) for the certificate of deposit you want to compare.
Enter your Federal marginal tax rate (%) and State tax rate (%). If your state does not tax interest, set state to 0.
Review the I Bond after‑tax APY, CD after‑tax APY, and the Advantage in percentage points to see which account offers the higher after‑tax yield under your assumptions.

Inputs explained

I Bond composite rate (%): The current composite rate for Series I savings bonds (fixed rate + inflation rate) as published by the U.S. Treasury. This rate changes over time; you should update it whenever new I Bond rates are announced.
CD APY (%): The annual percentage yield on the CD you are evaluating, reflecting its stated rate and compounding. Use the APY rather than the nominal rate to keep comparisons fair.
Federal marginal tax rate (%): Your marginal federal income tax rate on interest income. This is the rate applied to additional dollars of interest and is used to estimate federal tax on both I Bonds and CDs.
State tax rate (%): The marginal state (and, if relevant, local) tax rate that applies to interest income. I Bonds are exempt from this tax, while CDs are generally fully taxable at the state level. If your state does not tax this income, set this to 0%.

How it works

For I Bonds, interest is taxed at the federal level but exempt from state and local income tax. The calculator estimates I Bond after‑tax APY as: I Bond after‑tax = I Bond rate × (1 − Federal tax rate).

For CDs, interest is typically taxable at both the federal and state levels. We approximate CD after‑tax APY as: CD after‑tax = CD APY × (1 − Federal tax rate − State tax rate), assuming no special deductions or credits.

The advantage in percentage points is simply Advantage = I Bond after‑tax − CD after‑tax. A positive value means the I Bond yields more after tax; a negative value means the CD yields more.

Because both yields are expressed as annual percentages, you can compare them directly without converting to dollars, though you can always multiply each after‑tax rate by your investment amount to see annual interest in dollars.

The calculator intentionally focuses on tax treatment over a simple one‑year snapshot of yields and does not attempt to model rate resets, penalties, or holding‑period rules in detail.

Formula

I Bond after-tax = I Bond rate × (1 − Federal rate)
CD after-tax = CD APY × (1 − Federal rate − State rate)
Advantage (I Bond − CD) = I Bond after-tax − CD after-tax

When to use it

Comparing whether a slightly lower‑yielding I Bond is actually more attractive than a higher‑yield CD once you factor in state‑tax exemption on I Bond interest.
Evaluating where to park emergency savings or medium‑term cash when you’d like to balance yield, tax efficiency, and liquidity.
Understanding the tax trade‑off when you are in a high‑tax state: I Bonds may gain more relative advantage as state tax rates increase.
Providing a quick after‑tax yield check before committing to a long‑term CD that locks in a rate versus buying I Bonds up to annual limits.
Teaching how taxes affect nominal yields so that investors look beyond headline APYs, especially when comparing tax‑advantaged and fully taxable instruments.

Tips & cautions

Remember that I Bonds have purchase limits ($10,000 per person per year electronically, plus possible paper purchases via tax refund) and a one‑year lockup; you cannot redeem them in the first 12 months.
Redeeming I Bonds within the first five years forfeits the last three months of interest as a penalty; this effectively reduces your realized yield if you cash out early.
Bank CDs often carry early withdrawal penalties, while brokered CDs can be sold in a secondary market, but their market value may drop if interest rates rise. Yield is only part of the decision—liquidity and penalty structure matter too.
I Bond composite rates reset every six months based on inflation; if inflation falls, the variable component can decline, changing the future effective yield. CD rates are typically fixed for the term.
State tax rules can be nuanced. Some states have special treatment for U.S. government obligations or may not tax interest at all. When in doubt, check how your state taxes both I Bonds and CDs.
Models a single year of after‑tax yield and does not account for I Bond rate resets over time, changes in inflation, or multi‑year CD structures.
Assumes CDs are fully taxable at both federal and state levels and that I Bonds are fully exempt from state/local tax; actual treatment may differ for certain taxpayers or jurisdictions.
Ignores purchase limits, lockup periods, early redemption penalties, and term length differences, all of which can materially influence which product is better for your situation.
Does not factor in specialized tax benefits such as the I Bond education exclusion for qualifying higher‑education expenses, or interactions with AMT or phaseouts.
Focuses purely on yield and tax treatment; it does not consider credit risk (for non‑FDIC CDs), issuer risk, or other aspects of safety and diversification.

Worked examples

I Bond 4.5%, CD 5.0%, 24% federal, 5% state

I Bond after-tax = 4.5% × (1 − 0.24) = 4.5% × 0.76 ≈ 3.42%.
CD after-tax = 5.0% × (1 − 0.24 − 0.05) = 5.0% × 0.71 ≈ 3.55%.
Advantage ≈ 3.42% − 3.55% ≈ −0.13 percentage points, meaning the CD yields slightly more after tax in this scenario.

I Bond 5.3%, CD 4.8%, 22% federal, 6% state

I Bond after-tax ≈ 5.3% × (1 − 0.22) = 5.3% × 0.78 ≈ 4.13%.
CD after-tax ≈ 4.8% × (1 − 0.22 − 0.06) = 4.8% × 0.72 ≈ 3.46%.
Advantage ≈ 4.13% − 3.46% ≈ +0.67 percentage points, meaning the I Bond is clearly ahead after tax.

High-tax state scenario tilting advantage toward I Bonds

Assume I Bond rate = 4.0%, CD APY = 4.5%, federal = 24%, state = 9%.
I Bond after-tax ≈ 4.0% × (1 − 0.24) = 3.04%.
CD after-tax ≈ 4.5% × (1 − 0.24 − 0.09) = 4.5% × 0.67 ≈ 3.02%.
Despite the CD’s higher nominal rate, the I Bond edges out after tax in this high‑state‑tax scenario.

Deep dive

Compare I Bonds versus CDs on an apples‑to‑apples after‑tax basis by entering their rates and your federal and state tax brackets. See which choice delivers the higher net yield once tax advantages and state exemptions are factored in.

This calculator highlights the impact of I Bonds’ state and local tax exemption compared to fully taxable CD interest, making it easier to decide where to keep cash in a high‑tax or low‑tax state.

Use the results as a quick filter before digging deeper into liquidity, risk, and term length comparisons for your broader savings strategy.

FAQs

Are Series I savings bonds taxed by states and localities?: No. I Bond interest is exempt from state and local income taxes, but it is subject to federal income tax when you redeem the bond or it matures (unless you qualify for certain education tax exclusions).
How long do I need to hold I Bonds before I can redeem them?: I Bonds cannot be redeemed in the first 12 months. If you redeem them within the first five years, you forfeit the last three months of interest as a penalty. After five years, you can redeem without penalty up to the 30‑year maturity.
Do bank CDs always have early withdrawal penalties?: Most bank CDs charge early withdrawal penalties if you break the term, often measured in months of interest. Brokered CDs can be sold in secondary markets instead of being broken, but their price can move up or down with interest rates. This calculator focuses on after‑tax yields, not penalties or market price risk.
Does this calculator model future changes in I Bond or CD rates?: No. It shows a snapshot using the current I Bond composite rate and CD APY you enter. I Bond variable rates reset every six months based on inflation, and CD rates are typically fixed for the term. For multi‑year comparisons, you may want to rerun the calculator when rates change.
What about special I Bond tax benefits for education?: This tool does not include the education tax exclusion, which allows some taxpayers to exclude I Bond interest from federal tax when used for qualified higher‑education expenses under strict rules. If you think you may qualify, treat this comparison as conservative for I Bonds and discuss details with a tax professional.

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This I Bond vs CD after-tax calculator provides a simplified comparison of annual after-tax yields based on user-entered rates and tax assumptions. It does not model multi-year rate changes, purchase limits, penalties, or specialized tax treatments, and it is not financial or tax advice. Always verify product details, tax rules, and your personal situation with financial and tax professionals before making investment decisions.