Ibonds in taxable vs st bonds in ira?

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Ibonds in taxable vs st bonds in ira?

Postby mortal » Wed Dec 26, 2012 12:53 am

So, after reading the wiki article on the possibility of keeping one's emergency fund in an ira:

http://www.bogleheads.org/wiki/Placing_ ... ed_Account

I was wondering if it makes sense to move my emergency fund from ibonds to short term bonds in my ira?

Ibonds are basically yielding 0% + cpi (~1.8%?)

The short term bonds seem to be coming in at around 2%?
https://personal.vanguard.com/us/funds/ ... =INT#tab=1

So, if I split the finest of hairs, would one really come out noticeably better than the other?

P.S.I know that these two investment choices aren't technically at the same risk level, but I do think it's fairly close.
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Re: Ibonds in taxable vs st bonds in ira?

Postby sscritic » Wed Dec 26, 2012 2:08 am

I can't answer your question because I would never ask your question. I also don't believe that money magically appears whenever you wish.

Here are two problems for you to consider; one of them might be like yours.

1) I have $5k in an IRA and $5k in a taxable account. Would I rather have $5k of I bonds in taxable and $5k of total stock market in my IRA or $5k of total stock market in my taxable account and $5k of short term bonds in my IRA?

2) I just made $5k. Would I rather make a deductible contribution to my IRA and buy $5k of short term bonds or pay taxes on my income at 25% and buy $3,750 of I bonds in my taxable account? Note that having bought the I bonds with my post-tax income, I will not be able to make an IRA contribution this year. In 20 years, say, I will pay taxes on the I bond interest only but if I buy short term bonds in my IRA I will end up paying taxes on both the $5000 and the earnings at that 20 year mark.

Here are two more versions:

3) repeat 2 but make a non-deductible contribution to the IRA of $3,750.

4) repeat 3, then convert to a Roth. (I think this is equivalent to repeat 2, then convert to a Roth. One converts an already taxed IRA which is not taxed at conversion, the other a not yet taxed IRA which is taxed at conversion.)
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Re: Ibonds in taxable vs st bonds in ira?

Postby Johm221122 » Wed Dec 26, 2012 2:53 am

My biggest question would be is this how I want to use Roth space?with lowest risk/return assets,if I don't have to
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Re: Ibonds in taxable vs st bonds in ira?

Postby jeffyscott » Wed Dec 26, 2012 10:16 pm

mortal wrote:The short term bonds seem to be coming in at around 2%?
https://personal.vanguard.com/us/funds/ ... =INT#tab=1


You can't buy those past returns, the current SEC yield of that fund is 0.52%. The actual returns will vary depending on the future changes in interest rates, if no changes then you would get about 0.52%, that seems pretty likely to be less than the return of I-bonds.
press on, regardless - John C. Bogle
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Re: Ibonds in taxable vs st bonds in ira?

Postby mortal » Thu Dec 27, 2012 12:29 am

jeffyscott wrote:
mortal wrote:The short term bonds seem to be coming in at around 2%?
https://personal.vanguard.com/us/funds/ ... =INT#tab=1


You can't buy those past returns, the current SEC yield of that fund is 0.52%. The actual returns will vary depending on the future changes in interest rates, if no changes then you would get about 0.52%, that seems pretty likely to be less than the return of I-bonds.


Thanks for this!

As I understand it, the tax-adjusted return for my ibonds would be something like 1.8 * (1-.25) where .25 is my tax bracket.
So, ~1.35% at current cpi, however interest is deferred for 5 years so it's really sumOfFiveYearCPI * .75, etc. I'm ok with that.
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Re: Ibonds in taxable vs st bonds in ira?

Postby grabiner » Thu Dec 27, 2012 2:07 am

I would prefer I-Bonds in taxable, and hold something else in your IRA.

The principles of tax-efficient fund placement are based on an assumption that you have equal options. However, I-Bonds are currently better than the bonds you can buy in an IRA, as they yield 0% above inflation, which is better than you can earn on short-term TIPS. In addition, they have the advantage of tax deferral, and they are immune to interest-rate risk; if I-Bond and TIPS rates rise, you can sell your I-Bonds at face value (with a small penalty if sold before five years) and buy new bonds, while if you had bought marketable bonds, they would lose value.

(Conversely, the equal options work in the other direction if you work for the US Government, as you can then use the G fund in the TSP as an emergency fund.)
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