I-Bonds vs HYSA: How to Calculate Which Earns More Right Now

The Two Numbers That Determine the Winner

One yield is fixed for six months. The other can change tomorrow. That asymmetry is the core of this comparison.

The U.S. Treasury sets the I-Bond composite rate twice a year, on May 1 and November 1. The composite rate formula is: Fixed Rate + (2 x Semiannual Inflation Rate) + (Fixed Rate x Semiannual Inflation Rate). For the May 2025 period, the composite rate is 3.98% annualized. Your HYSA APY, by contrast, floats with the federal funds rate and can be repriced by your bank with no advance notice.

To compare them honestly, you need three inputs before running any math:

1. Your intended holding period in months.
2. Your marginal federal income tax rate (I-Bond interest is exempt from state and local tax; HYSA interest is not).
3. Whether you will redeem the I-Bond before the 5-year mark, which triggers the 3-month interest penalty.

Without all three, any comparison is incomplete.

How to Calculate I-Bond Effective Yield After Penalty

If you redeem an I-Bond before 5 years, the Treasury withholds the most recent 3 months of interest. That penalty changes your effective annual yield significantly at shorter time horizons.

The formula for effective annualized I-Bond yield with an early redemption penalty is:

Effective Yield = ((Total Interest Earned - 3-Month Penalty) / Principal) x (12 / Holding Period in Months)

Worked Example 1: $10,000 I-Bond Held for 18 Months at 3.98%

Assume a flat 3.98% composite rate for simplicity. Actual rates will vary per reset period.

Monthly rate = 3.98% / 12 = 0.3317%

Total interest over 18 months: $10,000 x ((1 + 0.003317)^18 - 1) = approximately $613.

The 3-month penalty equals 3 months of interest at the rate in effect at redemption. At 3.98%, that is roughly $10,000 x (0.003317 x 3) = $99.50.

Net interest after penalty: $613 - $99.50 = $513.50.

Effective annualized yield: ($513.50 / $10,000) x (12 / 18) = 3.42%.

Before taxes, you earned 3.42% annualized, not 3.98%. That 56-basis-point gap matters when comparing to a HYSA.

How to Calculate HYSA After-Tax Yield

HYSA interest is subject to federal, state, and local income tax in the year it is earned. I-Bond interest is deferred until redemption and exempt from state and local tax. That difference can shift the outcome by 30 to 60 basis points depending on your state.

After-tax HYSA yield = HYSA APY x (1 - Federal Rate - State Rate - Local Rate)

After-tax I-Bond yield = I-Bond Effective Yield x (1 - Federal Rate only)

Worked Example 2: $10,000, 18-Month Horizon, 24% Federal Rate, 5% State Rate

Assume a HYSA paying 4.50% APY.

HYSA gross interest over 18 months: $10,000 x ((1 + 0.045/12)^18 - 1) = approximately $697.

After-tax HYSA interest: $697 x (1 - 0.24 - 0.05) = $697 x 0.71 = $494.87.

After-tax HYSA annualized yield: ($494.87 / $10,000) x (12 / 18) = 3.30%.

Now compare to the I-Bond from Worked Example 1. After-tax I-Bond yield: $513.50 x (1 - 0.24) = $390.26 net. Annualized: ($390.26 / $10,000) x (12 / 18) = 2.60%.

At these inputs, the HYSA wins by 70 basis points after tax, even though the I-Bond's gross rate looks lower than the HYSA APY by only 52 basis points. The early redemption penalty and the state tax exemption nearly cancel each other out. The HYSA still comes out ahead on this 18-month horizon.

Flip the holding period to 60 months (past the penalty window), eliminate the state tax arbitrage in a no-income-tax state like Florida or Texas, and the I-Bond frequently wins. The math is not static.

The Variable That Most Savers Ignore: Rate Reset Risk

A HYSA yielding 4.50% today may yield 3.75% in 90 days if the Federal Reserve cuts rates. The I-Bond rate you lock in at purchase applies for the full 6-month period, then resets. Neither instrument is truly fixed, but they carry different types of rate risk.

I-Bonds expose you to inflation-rate reset risk. If CPI-U falls sharply, the semiannual inflation component drops, and so does your composite rate. In the six-month period ending April 2024, the composite rate fell to 4.28% from the prior 5.27%.

HYSAs expose you to Fed policy risk. Banks typically reprice savings rates within 30 to 60 days of a Fed funds rate cut.

For cash you will not touch for at least 12 months, the I-Bond's state tax exemption and inflation linkage provide structural advantages that a HYSA cannot replicate. For cash you may need in under 12 months, the I-Bond is disqualified entirely. Treasury rules prohibit redemption in the first 12 months.

The Purchase Limit Changes the Allocation Math

The Treasury caps I-Bond purchases at $10,000 per Social Security number per calendar year, plus $5,000 in paper bonds via an IRS tax refund. A HYSA has no deposit ceiling.

For a household with $250,000 in cash savings, I-Bonds can represent at most 4% to 6% of that position annually. The rest sits in a HYSA, money market fund, Treasury bills, or a CD ladder. The comparison is therefore less about choosing one over the other and more about optimizing the I-Bond allocation within a broader cash strategy.

Run Your Specific Numbers Before Allocating

The worked examples above use simplified flat-rate assumptions. Your actual outcome depends on the exact I-Bond composite rates for each 6-month period you hold, your state's income tax rate, your redemption timing, and any rate changes your HYSA bank applies.

The CalcMoney Savings Calculator lets you enter your principal, time horizon, and applicable rates to model both scenarios side by side. Run the comparison with your own numbers before your next I-Bond purchase window or your next HYSA transfer.

Open the Savings Calculator and compare your I-Bond vs HYSA yield now →

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Results are estimates for informational purposes only. Consult a licensed financial professional before making financial decisions.