I Bonds vs Tax Exempt Bonds

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mtbiker
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I Bonds vs Tax Exempt Bonds

Post by mtbiker »

I have not been able to find a good discussion of this on the net. I have need to hold some bonds in my taxable account. Right now I have been using Vanguard Tax Exempt Intermediate Bond fund.

How would buying some I bonds stack up against this? My assumption is less risky less return since I bonds return the inflation rate at present. My gut tells me I would rather have the munis than the I bond since the return may be higher but I honestly dont really know how I should be thinking about it.

Thoughts?
Call_Me_Op
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Re: I Bonds vs Tax Exempt Bonds

Post by Call_Me_Op »

mtbiker wrote:I have not been able to find a good discussion of this on the net. I have need to hold some bonds in my taxable account. Right now I have been using Vanguard Tax Exempt Intermediate Bond fund.

How would buying some I bonds stack up against this? My assumption is less risky less return since I bonds return the inflation rate at present. My gut tells me I would rather have the munis than the I bond since the return may be higher but I honestly dont really know how I should be thinking about it.

Thoughts?
I-Bonds are a better deal, but you are limited to 10K per year per SSN. The I-Bond return is probably comparable to the muni fund (depends upon your tax rate when you sell the bonds) assuming inflation meets expectation, but the I-bonds have no risk of loss of nominal value. The muni fund could tank at any time.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
dbr
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Re: I Bonds vs Tax Exempt Bonds

Post by dbr »

mtbiker wrote:I have not been able to find a good discussion of this on the net. I have need to hold some bonds in my taxable account. Right now I have been using Vanguard Tax Exempt Intermediate Bond fund.

How would buying some I bonds stack up against this? My assumption is less risky less return since I bonds return the inflation rate at present. My gut tells me I would rather have the munis than the I bond since the return may be higher but I honestly dont really know how I should be thinking about it.

Thoughts?
This is an assessment of apples and oranges. I would say the properties of muni's and I-bonds are much discussed.

Comparing the two investments based on return may not be meaningful as the primary distinction between the two is that I-bonds are inflation indexed and muni's are nominal bonds. Another distinction is between making a thirty year deferment of tax on the income compared to tax free income. A third distinction is that I-bonds are not marketable and maintain a fixed price for redemption. A person concerned with possible market fluctuation in value might prefer I-bonds, for example as an emergency fund. Finally, as pointed out, the choice is often made for one by the lack of ability to move significant money into I-bonds in a lump sum. That may or may not apply to you.
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#Cruncher
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Re: I Bonds vs Tax Exempt Bonds

Post by #Cruncher »

dbr wrote:
  1. the primary distinction between the two is that I-bonds are inflation indexed and muni's are nominal bonds.
  2. Another distinction is between making a thirty year deferment of tax on the income compared to tax free income.
  3. A third distinction is that I-bonds are not marketable and maintain a fixed price for redemption.
Good synopsis, dbr. However, I'd add qualify your statements a litte:

2) While one could hold a 0% fixed-rate I bond bought today for 30 years, in my opinion, it's unlikely one would do so. If real interest rates rise to historic levels, it will become profitable to redeem these I bonds early and put the proceeds into either new ones or into TIPS. The deferred income would then become taxable. As if this weren't complicated enough already, another point is that i bonds are state-income-tax-free while income from a nation-wide tax-exempt fund is not.

3) I know what you mean, dbr, but the original poster might be confused. The redemption value is not fixed; it grows as interest is accumulated.
dbr
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Re: I Bonds vs Tax Exempt Bonds

Post by dbr »

#Cruncher wrote:
dbr wrote:
  1. the primary distinction between the two is that I-bonds are inflation indexed and muni's are nominal bonds.
  2. Another distinction is between making a thirty year deferment of tax on the income compared to tax free income.
  3. A third distinction is that I-bonds are not marketable and maintain a fixed price for redemption.
Good synopsis, dbr. However, I'd add qualify your statements a litte:

2) While one could hold a 0% fixed-rate I bond bought today for 30 years, in my opinion, it's unlikely one would do so. If real interest rates rise to historic levels, it will become profitable to redeem these I bonds early and put the proceeds into either new ones or into TIPS. The deferred income would then become taxable. As if this weren't complicated enough already, another point is that i bonds are state-income-tax-free while income from a nation-wide tax-exempt fund is not.

3) I know what you mean, dbr, but the original poster might be confused. The redemption value is not fixed; it grows as interest is accumulated.
Thanks for the additions. These are important points of clarification.
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Re: I Bonds vs Tax Exempt Bonds

Post by bdpb »

What type of bonds are you holding in your non-taxable accounts now?

If you're holding short term Treasuries, at current rates you can shift the Treasuries to taxable cheaper than
holding stocks.

You can completely eliminate the apples and oranges discussions about which kinds of bonds to use.
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mtbiker
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Re: I Bonds vs Tax Exempt Bonds

Post by mtbiker »

Thanks for the comments thus far. I am still a bit murky on the topic though.

Yes, I understand these are different products which work differently.

But for me, they would be serving the same purpose, ie holding bonds in my taxable account.

So my question is, which is better I bonds or Munis? Or at least which is better for me? I am 35% tax bracket and no state income tax.

I already have lots of munis. I am trying to decide if I should divert some of the new taxable account bond purchases from muni to I bonds.
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tfb
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Re: I Bonds vs Tax Exempt Bonds

Post by tfb »

mtbiker wrote:So my question is, which is better I bonds or Munis? Or at least which is better for me? I am 35% tax bracket and no state income tax.
Just do both; then you don't have to worry about which is better. You can't buy too much I bonds anyway. So you will have both.

EDIT: meant to say "you can't buy too much ..."
Last edited by tfb on Wed Jun 20, 2012 9:46 pm, edited 1 time in total.
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baw703916
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Re: I Bonds vs Tax Exempt Bonds

Post by baw703916 »

tfb wrote:
mtbiker wrote:So my question is, which is better I bonds or Munis? Or at least which is better for me? I am 35% tax bracket and no state income tax.
Just do both; then you don't have to worry about which is better. You can buy too much I bonds anyway. So you will have both.
I think that's good advice.
Most of my posts assume no behavioral errors.
manuvns
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Re: I Bonds vs Tax Exempt Bonds

Post by manuvns »

if you like risk buy muni bonds. I series Bonds are risk free .
Thanks!
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Re: I Bonds vs Tax Exempt Bonds

Post by stlutz »

One thing to consider is whether you want to open an account with another provider (in this case, Treasury Direct) or not. If you're in the 35% bracket, buying 10K of I-Bonds may be enough money relative to your overall portfolio to matter.
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Re: I Bonds vs Tax Exempt Bonds

Post by baw703916 »

manuvns wrote:if you like risk buy muni bonds. I series Bonds are risk free .
They also have zero real return before taxes. And, someone in the 35% tax bracket simply isn't going to be able to put a very large proportion of their portolio into I bonds. So, what should the OP do with the rest of the money?
Most of my posts assume no behavioral errors.
Call_Me_Op
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Re: I Bonds vs Tax Exempt Bonds

Post by Call_Me_Op »

baw703916 wrote:
manuvns wrote:if you like risk buy muni bonds. I series Bonds are risk free .
They also have zero real return before taxes. And, someone in the 35% tax bracket simply isn't going to be able to put a very large proportion of their portolio into I bonds. So, what should the OP do with the rest of the money?
Lots of options to consider, none of them particularly attractive at the moment.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
mynewname
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Re: I Bonds vs Tax Exempt Bonds

Post by mynewname »

After ibond how much munis should one hold if in the 35% tax bracket? Should all bond allocation in a taxable account be muni bonds?
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baw703916
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Re: I Bonds vs Tax Exempt Bonds

Post by baw703916 »

mynewname wrote:After ibond how much munis should one hold if in the 35% tax bracket? Should all bond allocation in a taxable account be muni bonds?
In the 35% bracket, I don't think you should consider anything but tax-exempt bonds and tax-deferred bonds (EE and I savings bonds) in taxable.
Most of my posts assume no behavioral errors.
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Johnora
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Re: I Bonds vs Tax Exempt Bonds

Post by Johnora »

After lurking and reading for months on this forum, I have learned a lot. Great advice on I-bonds. Coming from a state with a personal income tax, it would seem that with I-bonds I would take full advantage of the state tax free status of the bonds. Only setting at the 28% tax bracket now, but probably sticking close to it in retirement due to a couple of decent pensions (spouse and I) and being frugal and sticking away 17% each year on top of everything else. We will now consider adding I-bonds back into our plan. Thanks for all the great info!!
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