Anyone should not buy I bonds?

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am
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Anyone should not buy I bonds?

Post by am »

Seems like most around here recommend buying I bonds every year. Assuming all tax advantaged space is filled, and putting money into taxable accounts, should everyone also invest in I bonds or are there some exceptions where it does not make sense?
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yatesd
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Re: Anyone should not buy I bonds?

Post by yatesd »

- Maybe if you need it within a year
- Already have too many bonds
dbr
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Re: Anyone should not buy I bonds?

Post by dbr »

If you are buying for tax deferral realizing that the tax comes due at the thirty year point and the earnings also stop then. That might be one of your highest tax years. It is possible to pay off the tax as you go.
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Re: Anyone should not buy I bonds?

Post by z3r0c00l »

If you want to use iBonds as part of bond allocations, you should be buying them whenever you can until you get the amount that you need. I am poor/young enough that after a few more years I will probably not need any more conservative money in ibonds and stop buying them!
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VictoriaF
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Re: Anyone should not buy I bonds?

Post by VictoriaF »

Don't buy IBonds if you are 99 years old and don't expect to live another 30 years.

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Mel Lindauer
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Re: Anyone should not buy I bonds?

Post by Mel Lindauer »

As dbr pointed out, young investors should try to imagine where they'll be in terms of their career and tax bracket in 30 years, which is the final maturity (and tax due date). If it appears the'll be retired and in a low tax bracket, then buying makes sense. However, if they feel they'll likely be in their peak earning years and thus in a high tax bracket, then buying might not make sense, unless they feel they'll be able to take advantage of the tax-free qualifying educational benefit.
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surfer1
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Re: Anyone should not buy I bonds?

Post by surfer1 »

I-bonds are currently paying 1.38%, whereas you can get a 5-year CD for 3.04%, which is more than twice that amount. Depending on how long you planned on holding it, that makes the decision a little harder.
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Re: Anyone should not buy I bonds?

Post by Igglesman »

I don't buy I-bonds because it is impossible to deal with Treasury Direct. Not worth the efforts.

If any regular bank made it as difficult to put money in and take money out as Treas Direct does, no one would recommend them.
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Mel Lindauer
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Re: Anyone should not buy I bonds?

Post by Mel Lindauer »

surfer1 wrote:I-bonds are currently paying 1.38%, whereas you can get a 5-year CD for 3.04%, which is more than twice that amount. Depending on how long you planned on holding it, that makes the decision a little harder.
Do you have a link to that CD? I'm sure others might be interested.
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VictoriaF
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Re: Anyone should not buy I bonds?

Post by VictoriaF »

Mel Lindauer wrote:
surfer1 wrote:I-bonds are currently paying 1.38%, whereas you can get a 5-year CD for 3.04%, which is more than twice that amount. Depending on how long you planned on holding it, that makes the decision a little harder.
Do you have a link to that CD? I'm sure others might be interested.
Hi Mel,

It's in this thread: http://www.bogleheads.org/forum/viewtop ... 0&t=127430 .

Victoria
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Mel Lindauer
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Re: Anyone should not buy I bonds?

Post by Mel Lindauer »

VictoriaF wrote:
Mel Lindauer wrote:
surfer1 wrote:I-bonds are currently paying 1.38%, whereas you can get a 5-year CD for 3.04%, which is more than twice that amount. Depending on how long you planned on holding it, that makes the decision a little harder.
Do you have a link to that CD? I'm sure others might be interested.
Hi Mel,

It's in this thread: http://www.bogleheads.org/forum/viewtop ... 0&t=127430 .

Victoria
Thanks, Victoria. One of the problems of being a forum Moderator is that we don't have as much time as we'd like to read more of the posts, so we often miss informative posts like that.
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Re: Anyone should not buy I bonds?

Post by HawaiiBrewer »

surfer1 wrote:I-bonds are currently paying 1.38%, whereas you can get a 5-year CD for 3.04%, which is more than twice that amount. Depending on how long you planned on holding it, that makes the decision a little harder.
I bought some of the 5yr CD's but also will be buying the I Bonds for inflation protection, conservative preservation of our nest egg. As Igglesman said, Treasury direct is not too easy..they kicked out my wife's application and are requiring an "authorization" form be filled out and certified by a financial institution because they couldn't verify her identity :annoyed My application on line went thru easily.....go figure.

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Re: Anyone should not buy I bonds?

Post by z3r0c00l »

surfer1 wrote:I-bonds are currently paying 1.38%, whereas you can get a 5-year CD for 3.04%, which is more than twice that amount. Depending on how long you planned on holding it, that makes the decision a little harder.
How does that 5 year CD, with a 1 year penalty, look 2 years into a 5 year stretch of 5%+ inflation? Long CDs with severe penalties like Penfed have a very real exposure to inflation. That 5 year CD will probably match inflation over 5 years, possibly beat it, but also possibly fall way behind. The ibond will match inflation 100% of the time, and has less of a penalty after 12 months. After 5 years, when you will roll into a new CD with the same restrictive penalty, that iBond will mature to zero penalty and continue to update rates regularly. Imagine if a bank offered a penalty free CD that allowed you to change rates several times a year? That is an iBond after year 5. Yes it returns less and has purchase limits, but the benefits are real also.
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Re: Anyone should not buy I bonds?

Post by Calm Man »

Yes, me. I don't want to bother with the government web site for owning securities. For many, particularly older people who have accumulated a lifetime of assets, 10K a year is not enough to make an impact on anything. And for me, I figure that when I die, nobody would figure out I had them anyway even if I told them to check.
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Re: Anyone should not buy I bonds?

Post by manwithnoname »

Why would I buy an investment that is only paying 1.38% and is limited to a maximum purchase of $10,000 per year? 10k is too small to effect my investment allocation and way below my return on fixed investments. I can do better buying muni bonds.
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Re: Anyone should not buy I bonds?

Post by poker27 »

Speaking of the horrible treasury direct site... I recently decided to begin purchasing I bonds. How and when does the interest begin accumulating? I logged onto the site and still shows my balance of 10,000 after a fee months of owning. I understand interest starts at day 1, but does it take 12months to show?
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Re: Anyone should not buy I bonds?

Post by Mel Lindauer »

poker27 wrote:Speaking of the horrible treasury direct site... I recently decided to begin purchasing I bonds. How and when does the interest begin accumulating? I logged onto the site and still shows my balance of 10,000 after a fee months of owning. I understand interest starts at day 1, but does it take 12months to show?
You're seeing the redemption value. TD withholds the last three months' interest as the penalty for redemption prior to holding them for five years. You should see the first month's interest after four months. Then, at the five-year mark, there is no penalty, so TD no longer withholds the past three months' interest.
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Re: Anyone should not buy I bonds?

Post by BL »

poker27 wrote:Speaking of the horrible treasury direct site... I recently decided to begin purchasing I bonds. How and when does the interest begin accumulating? I logged onto the site and still shows my balance of 10,000 after a fee months of owning. I understand interest starts at day 1, but does it take 12months to show?
I believe it lags by 3 months until you have owned it 5 years.
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Re: Anyone should not buy I bonds?

Post by Geist »

poker27 wrote:Speaking of the horrible treasury direct site... I recently decided to begin purchasing I bonds. How and when does the interest begin accumulating? I logged onto the site and still shows my balance of 10,000 after a fee months of owning. I understand interest starts at day 1, but does it take 12months to show?
No, interest is calculated & distributed (into your I-Bond balance) monthly, right around the 1st of each month.
BL wrote:I believe it lags by 3 months until you have owned it 5 years.
.....although I have also heard this is the case. I honestly haven't noticed (or cared to calculate it) with any of my I-Bonds...
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Re: Anyone should not buy I bonds?

Post by VictoriaF »

Mel Lindauer wrote:
VictoriaF wrote:
Mel Lindauer wrote:
surfer1 wrote:I-bonds are currently paying 1.38%, whereas you can get a 5-year CD for 3.04%, which is more than twice that amount. Depending on how long you planned on holding it, that makes the decision a little harder.
Do you have a link to that CD? I'm sure others might be interested.
Hi Mel,

It's in this thread: http://www.bogleheads.org/forum/viewtop ... 0&t=127430 .

Victoria
Thanks, Victoria. One of the problems of being a forum Moderator is that we don't have as much time as we'd like to read more of the posts, so we often miss informative posts like that.
Hi Mel,

But is not it more fun to read off-topic posts (before surgically removing them)? {smile}

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Re: Anyone should not buy I bonds?

Post by VictoriaF »

Calm Man wrote:Yes, me. I don't want to bother with the government web site for owning securities. For many, particularly older people who have accumulated a lifetime of assets, 10K a year is not enough to make an impact on anything. And for me, I figure that when I die, nobody would figure out I had them anyway even if I told them to check.
If I Bonds are appropriate for your heirs, you can teach them how to accumulate their own I Bonds, and then getting yours would not be a problem.

I Bonds are a good option for those in a high tax bracket who have exhausted all tax-deferred venues and still have plenty of taxable cash. Dealing with the government can be very painful, but most of the pain spikes in the beginning and then subsides. And some diversification between the industry (Vanguard) and government (the Treasury) may not be a bad idea.

Victoria
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Re: Anyone should not buy I bonds?

Post by nisiprius »

manwithnoname wrote:Why would I buy an investment that is only paying 1.38% and is limited to a maximum purchase of $10,000 per year? 10k is too small to effect my investment allocation and way below my return on fixed investments. I can do better buying muni bonds.
You are comparing apples and oranges. Municipal bonds have interest rate risk, I bonds do not. I bond redemption values are unaffected by interest rates.

With ordinary marketable bonds, if interest rates rise you might wish you could exchange your old low-interest bonds for new ones with higher rates, but bond math guarantees that your old bonds will have dropped in value by exactly the right amount to make the exchange useless. WIth I bonds, if interest rates rise there is no loss in redemption value and can indeed replace the old bonds with new ones.

I bonds are the "non-remorse" bond investment.

Municipal bonds have higher risk and higher returns than I bonds? Yes, and stocks have higher risk and higher return than municipal bonds. So what?
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Re: Anyone should not buy I bonds?

Post by Igglesman »

One more reason to not invest in I-Bonds....

I-Bonds do not pass the "Beer Truck Test". If I get hit by a beer truck today, the i-bonds will be the most difficult of all my investments to redeem (and especially for a small portion of our nest egg).

The Beer Truck Test states to keep is as simple as possible...make it easy for the heirs.
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Re: Anyone should not buy I bonds?

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am wrote:Seems like most around here recommend buying I bonds every year. Assuming all tax advantaged space is filled, and putting money into taxable accounts, should everyone also invest in I bonds or are there some exceptions where it does not make sense?
There are some specific situations where they can make sense like college savings, emergency fund, or for a specific goal, but for holding them long term in general I think they are currently a pretty poor choice at the current fixed rate they are paying. There are also situations where you only intend to keep them for a few years where they can make sense too since you are sometimes able to use them to get a higher interest rate than CD's or a money market fund.

They are taxed on the inflation adjustment and still have a fixed yield of next to nothing so after taxes they are pretty much guaranteed to lose purchasing power if you hold them for a long time.

To make matters worse they don't go to your estate at a stepped up cost basis either.
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Re: Anyone should not buy I bonds?

Post by MnD »

No I bonds for me.
I think the TSP G fund is a superior fixed income product with inflation protection.
I need yet another "miscellaneous" financial account like I need a hole in the head.
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Re: Anyone should not buy I bonds?

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My reasons are similar to others: small potatoes (bond alloc >400k) plus extra complexity with another account and heard stories of struggles with TD.
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Re: Anyone should not buy I bonds?

Post by nisiprius »

Igglesman wrote:One more reason to not invest in I-Bonds....

I-Bonds do not pass the "Beer Truck Test". If I get hit by a beer truck today, the i-bonds will be the most difficult of all my investments to redeem (and especially for a small portion of our nest egg).

The Beer Truck Test states to keep is as simple as possible...make it easy for the heirs.
I like the phrase "beer truck test."

Yeah, I've been brooding about that, too. Originally one of my reasons for investing in PAPER I bonds, with my wife as co-owner, was that it seemed to me that PAPER I bonds passed that test with ease.

1 High likelihood of discovery (physically in the safe deposit box);
2. Liquidationability (not a word but don't know the right word) diversification.The factors affecting whether heirs could liquidate them are DIFFERENT from other modalities).
3. Ease of liquidation (walk 25 feet from safe deposit box to teller's counter and hand them across the counter).

None of those things is true any more.
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Re: Anyone should not buy I bonds?

Post by VictoriaF »

MnD wrote:No I bonds for me.
I think the TSP G fund is a superior fixed income product with inflation protection.
I need yet another "miscellaneous" financial account like I need a hole in the head.
I keep my TSP funds in the G Fund. But eventually (pretty soon) I will have to take the money out, place them in an IRA, and start Roth conversions. My I-Bonds will be with me long after the G Fund will be gone.

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Re: Anyone should not buy I bonds?

Post by VictoriaF »

Igglesman wrote:One more reason to not invest in I-Bonds....

I-Bonds do not pass the "Beer Truck Test". If I get hit by a beer truck today, the i-bonds will be the most difficult of all my investments to redeem (and especially for a small portion of our nest egg).

The Beer Truck Test states to keep is as simple as possible...make it easy for the heirs.
Two hours ago, a large construction truck has hit a side of a bus. It happened in front of my eyes, I was immediately behind the bus. The first thing I thought about was my I Bond holdings. NOT.

Victoria
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Re: Anyone should not buy I bonds?

Post by manwithnoname »

nisiprius wrote:
manwithnoname wrote:Why would I buy an investment that is only paying 1.38% and is limited to a maximum purchase of $10,000 per year? 10k is too small to effect my investment allocation and way below my return on fixed investments. I can do better buying muni bonds.
You are comparing apples and oranges. Municipal bonds have interest rate risk, I bonds do not. I bond redemption values are unaffected by interest rates.

With ordinary marketable bonds, if interest rates rise you might wish you could exchange your old low-interest bonds for new ones with higher rates, but bond math guarantees that your old bonds will have dropped in value by exactly the right amount to make the exchange useless. WIth I bonds, if interest rates rise there is no loss in redemption value and can indeed replace the old bonds with new ones.

I bonds are the "non-remorse" bond investment.

Municipal bonds have higher risk and higher returns than I bonds? Yes, and stocks have higher risk and higher return than municipal bonds. So what?

I am not comparing apples to oranges. I am comparing two investments- one of which generates an investment return of 1.38% which is subject to federal taxation with another investment that pays 5% tax free which I use to pay current living expenses. I use my stocks to generate qualified dividends to keep pace with inflation so I don't have to sell any investments. I don't need to put my money in an I bond and hope that inflation will dramatically increase over the next 30 years to justify the low interest rate in effect now. I don't need to put my money in a cooler.

Anyway 10k a year is too small an amount to be managed effectively and everything I read about TD says its not an investor friendly fund.

So if you like I bonds, knock yourself out.
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