I-Bonds for someone in their early 30s? pay taxes annually?

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icedtea
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I-Bonds for someone in their early 30s? pay taxes annually?

Post by icedtea » Sun Dec 16, 2012 10:16 pm

I'm almost 31, and I'm thinking of putting a portion of my EF into I Bonds. The Bogleheads wiki says I-Bonds may not be a good investment for someone who foresees being in a higher tax bracket at time of withdrawal. Is it possible to pay off the tax on I-Bonds each year so as to avoid paying all the tax at a time when you're in a higher bracket? I foresee being in a higher bracket later in my 30s-40s. Or am I better off sticking with a 5-yr CD in my EF?

Iced Tea

surfer1
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Re: I-Bonds for someone in their early 30s? pay taxes annual

Post by surfer1 » Sun Dec 16, 2012 10:37 pm

I don't think there is a 5-year CD that pays more than an ibond. Both are taxable as ordinary income, but ibonds at least give you some advantages (no state tax, deferred federal tax, etc). I think it's easier to keep it simple and just pay the taxes when cashing out. So given those considerations, fill up on ibonds, then CDs.

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Jerilynn
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Re: I-Bonds for someone in their early 30s? pay taxes annual

Post by Jerilynn » Mon Dec 17, 2012 2:25 am

icedtea wrote:I'm almost 31, and I'm thinking of putting a portion of my EF into I Bonds. The Bogleheads wiki says I-Bonds may not be a good investment for someone who foresees being in a higher tax bracket at time of withdrawal. Is it possible to pay off the tax on I-Bonds each year so as to avoid paying all the tax at a time when you're in a higher bracket? I foresee being in a higher bracket later in my 30s-40s. Or am I better off sticking with a 5-yr CD in my EF?

Iced Tea
At 31, there is no way to predict what your tax rate will be at the time of withdrawal (at retirement.)
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Re: I-Bonds for someone in their early 30s? pay taxes annual

Post by Grt2bOutdoors » Mon Dec 17, 2012 8:34 am

icedtea wrote:I'm almost 31, and I'm thinking of putting a portion of my EF into I Bonds. The Bogleheads wiki says I-Bonds may not be a good investment for someone who foresees being in a higher tax bracket at time of withdrawal. Is it possible to pay off the tax on I-Bonds each year so as to avoid paying all the tax at a time when you're in a higher bracket? I foresee being in a higher bracket later in my 30s-40s. Or am I better off sticking with a 5-yr CD in my EF?

Iced Tea
Do you foresee your income tax liability rising as a result of achieving a professional milestone, ie. resident becoming a full-fledged practicing cardio-thoracic surgeon? Or are you assuming your income will rise due to optomistic projections on your part?

You can elect to pay your accrued interest annually, however, once you make that election you pretty much have to stick to it for each tax year. You can request the Treasury department grant you permission to go back to the accrual method but that requires a form and a reasonable explanation why, and then they have to approve it.
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Re: I-Bonds for someone in their early 30s? pay taxes annual

Post by bungalow10 » Mon Dec 17, 2012 8:45 am

I'm 33 and putting money in ibonds. Long before retirement I could use them as an emergency fund (out of work, thus lower tax bracket) or to fund my kids' education (no federal taxes). Or if I hit the retirement savings jackpot and don't need the funds for a job less or education, and the markets have been good to me, I will take the risk that I may be in a higher tax bracket at retirement.

Just make sure you are maximizing Roth and 401k options first.
An elephant for a dime is only a good deal if you need an elephant and have a dime.

icedtea
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Re: I-Bonds for someone in their early 30s? pay taxes annual

Post by icedtea » Mon Dec 17, 2012 9:16 am

bungalow10 wrote:I'm 33 and putting money in ibonds. Long before retirement I could use them as an emergency fund (out of work, thus lower tax bracket) or to fund my kids' education (no federal taxes). Or if I hit the retirement savings jackpot and don't need the funds for a job less or education, and the markets have been good to me, I will take the risk that I may be in a higher tax bracket at retirement.

Just make sure you are maximizing Roth and 401k options first.
Good points.

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Phineas J. Whoopee
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Re: I-Bonds for someone in their early 30s? pay taxes annual

Post by Phineas J. Whoopee » Mon Dec 17, 2012 5:58 pm

Grt2bOutdoors wrote:
icedtea wrote:I'm almost 31, and I'm thinking of putting a portion of my EF into I Bonds. The Bogleheads wiki says I-Bonds may not be a good investment for someone who foresees being in a higher tax bracket at time of withdrawal. Is it possible to pay off the tax on I-Bonds each year so as to avoid paying all the tax at a time when you're in a higher bracket? I foresee being in a higher bracket later in my 30s-40s. Or am I better off sticking with a 5-yr CD in my EF?

Iced Tea
Do you foresee your income tax liability rising as a result of achieving a professional milestone, ie. resident becoming a full-fledged practicing cardio-thoracic surgeon? Or are you assuming your income will rise due to optomistic projections on your part?

You can elect to pay your accrued interest annually, however, once you make that election you pretty much have to stick to it for each tax year. You can request the Treasury department grant you permission to go back to the accrual method but that requires a form and a reasonable explanation why, and then they have to approve it.
Hi Iced Tea, Grt2BOutdoors,

With respect to changing from annual reporting to reporting only on redemption, you do indeed have to apply, but "Permission for the change is automatically granted if ...":
Change from method 2. To change from method 2 [reporting the interest each year] to method 1 [postponing reporting the interest], you must request permission from the IRS. Permission for the change is automatically granted if you send the IRS a statement that meets all the following requirements.

You have typed or printed the following number at the top: “131.”

It includes your name and social security number under “131.”

It includes the year of change (both the beginning and ending dates).

It identifies the savings bonds for which you are requesting this change.

It includes your agreement to:

Report all interest on any bonds acquired during or after the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, and

Report all interest on the bonds acquired before the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, with the exception of the interest reported in prior tax years.

You must attach this statement to your tax return for the year of change, which you must file by the due date (including extensions).

You can have an automatic extension of 6 months from the due date of your return for the year of change (excluding extensions) to file the statement with an amended return. On the statement, type or print “Filed pursuant to section 301.9100-2.” To get this extension, you must have filed your original return for the year of the change by the due date (including extensions).
http://www.irs.gov/publications/p550/ch ... nk10009895
Section titled US Savings Bonds
PJW

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Phineas J. Whoopee
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Re: I-Bonds for someone in their early 30s? pay taxes annual

Post by Phineas J. Whoopee » Mon Dec 17, 2012 6:03 pm

icedtea wrote:I'm almost 31, and I'm thinking of putting a portion of my EF into I Bonds. The Bogleheads wiki says I-Bonds may not be a good investment for someone who foresees being in a higher tax bracket at time of withdrawal. Is it possible to pay off the tax on I-Bonds each year so as to avoid paying all the tax at a time when you're in a higher bracket? I foresee being in a higher bracket later in my 30s-40s. Or am I better off sticking with a 5-yr CD in my EF?

Iced Tea
Hi Iced Tea,

For my emergency reserves only, I handle the issue by adding to them each year the amount I would have had to pay had I reported the savings bond interest that year. Nothing is guaranteed of course, but in that way I can have some confidence that I will be able to pay the taxes out of the emergency reserves, if some day I need to redeem the I Bonds. If the emergency never comes up, I have the earnings on the taxes I would have paid along the way. Feel free to copy the method if it makes sense to you. No royalties due. :happy

PJW

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Re: I-Bonds for someone in their early 30s? pay taxes annual

Post by bungalow10 » Mon Dec 17, 2012 6:18 pm

Phineas J. Whoopee wrote:
For my emergency reserves only, I handle the issue by adding to them each year the amount I would have had to pay had I reported the savings bond interest that year. Nothing is guaranteed of course, but in that way I can have some confidence that I will be able to pay the taxes out of the emergency reserves, if some day I need to redeem the I Bonds. If the emergency never comes up, I have the earnings on the taxes I would have paid along the way. Feel free to copy the method if it makes sense to you. No royalties due. :happy
The cool thing about earnings and interest is that if you redeem the investment and have positive earnings/interest on them and need to pay taxes, you can use the earnings/interest to pay the taxes! Each year's interest should more than cover that year's taxes, since taxes are never 100%.

No additional contributions or accounting maneuvers necessary. :beer
An elephant for a dime is only a good deal if you need an elephant and have a dime.

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Epsilon Delta
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Re: I-Bonds for someone in their early 30s? pay taxes annual

Post by Epsilon Delta » Mon Dec 17, 2012 6:52 pm

If you assume I bonds earn 3% a year (nominal) it is better to pay tax once at 27% than to pay taxes each year at 20%. This shows that deferring taxes may be worthwhile even if tax rates increase. The effect would be larger if the earnings were greater.

finley
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Re: I-Bonds for someone in their early 30s? pay taxes annual

Post by finley » Mon Dec 17, 2012 8:16 pm

I bonds are not good investments if you consider that after both inflation and taxes, the return is very poor. However, emergency funds should not be an investment. It is about conserving principal and having it available whenever you need it. Not sure which is better over the long haul for an EF, but the i bond has the major benefit of conserving purchasing power and might yield a little interest on top of that (although currently it does not.)

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Phineas J. Whoopee
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Re: I-Bonds for someone in their early 30s? pay taxes annual

Post by Phineas J. Whoopee » Mon Dec 17, 2012 8:26 pm

bungalow10 wrote:
Phineas J. Whoopee wrote:
For my emergency reserves only, I handle the issue by adding to them each year the amount I would have had to pay had I reported the savings bond interest that year. Nothing is guaranteed of course, but in that way I can have some confidence that I will be able to pay the taxes out of the emergency reserves, if some day I need to redeem the I Bonds. If the emergency never comes up, I have the earnings on the taxes I would have paid along the way. Feel free to copy the method if it makes sense to you. No royalties due. :happy
The cool thing about earnings and interest is that if you redeem the investment and have positive earnings/interest on them and need to pay taxes, you can use the earnings/interest to pay the taxes! Each year's interest should more than cover that year's taxes, since taxes are never 100%.

No additional contributions or accounting maneuvers necessary. :beer
Hi bungalow10,

Little as I like to be contradictory ( :twisted:), what you say is certainly true in nominal terms, but the reason to own I Bonds is to keep up in real terms. Now, of course nominal or real (or whatever) we are taxed on any amount that keeps us up with inflation even though in buying power we were just staying even. That's a tax law issue on which we have the benefit of a political process to affect future policy. However, just paying tax out of the earnings, where the real earnings (like today) are 0%, means after paying taxes now or later one will not keep up with inflation on an after-tax basis, rendering I Bonds partially ineffective. That's the point.

On the other hand, do you mind if I join you in the :beer anyway?

PJW

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Epsilon Delta
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Re: I-Bonds for someone in their early 30s? pay taxes annual

Post by Epsilon Delta » Mon Dec 17, 2012 9:15 pm

Phineas J. Whoopee wrote:
Little as I like to be contradictory ( :twisted:), what you say is certainly true in nominal terms, but the reason to own I Bonds is to keep up in real terms.
Since we're being contradictory:

That may be why you by I Bonds but I buy them because they offer the best prospects of return of alternatives with equal liquidity and credit risk. You're not entitled to a non-negative real return, and if you can't get one what are you going to do? Taking your money home looks like a dead loss, some return is better than no return.

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Re: I-Bonds for someone in their early 30s? pay taxes annual

Post by Phineas J. Whoopee » Mon Dec 17, 2012 10:07 pm

Epsilon Delta wrote:
Phineas J. Whoopee wrote:
Little as I like to be contradictory ( :twisted:), what you say is certainly true in nominal terms, but the reason to own I Bonds is to keep up in real terms.
Since we're being contradictory:

That may be why you by I Bonds but I buy them because they offer the best prospects of return of alternatives with equal liquidity and credit risk.
Hi Epsilon Delta,

That's as good as any reason I can think of. It certainly seems as if realized inflation will likely be higher than break even less 70 bps (based on today's closing 10-year TIPS yield as reported by the Treasury, here:
http://www.treasury.gov/resource-center ... =realyield)
Epsilon Delta wrote:You're not entitled to a non-negative real return, and if you can't get one what are you going to do?
In today's environment the word "entitled" sounds like poison.
Epsilon Delta wrote:Taking your money home looks like a dead loss, some return is better than no return.
Where did that come from? I'm serious - I want you to provide a reference to something I've said, or something I've linked to.

In today's interest rate environment I have consistently advocated I Bonds for the safe part of one's portfolio, as does any thinking person.

Post the reference or delete the sentence.

PJW

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Epsilon Delta
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Re: I-Bonds for someone in their early 30s? pay taxes annual

Post by Epsilon Delta » Mon Dec 17, 2012 11:04 pm

Phineas J. Whoopee wrote:
Epsilon Delta wrote:
Phineas J. Whoopee wrote:
Little as I like to be contradictory ( :twisted:), what you say is certainly true in nominal terms, but the reason to own I Bonds is to keep up in real terms.
Since we're being contradictory:

That may be why you by I Bonds but I buy them because they offer the best prospects of return of alternatives with equal liquidity and credit risk.
Hi Epsilon Delta,

That's as good as any reason I can think of. It certainly seems as if realized inflation will likely be higher than break even less 70 bps (based on today's closing 10-year TIPS yield as reported by the Treasury, here:
http://www.treasury.gov/resource-center ... =realyield)
Epsilon Delta wrote:You're not entitled to a non-negative real return, and if you can't get one what are you going to do?
In today's environment the word "entitled" sounds like poison.
Epsilon Delta wrote:Taking your money home looks like a dead loss, some return is better than no return.
Where did that come from? I'm serious - I want you to provide a reference to something I've said, or something I've linked to.

In today's interest rate environment I have consistently advocated I Bonds for the safe part of one's portfolio, as does any thinking person.

Post the reference or delete the sentence.

PJW
Perhaps I read too much into "The reason to own I Bonds is to keep up in real terms". If that's the reason to hold I Bonds, and they don't keep up in real terms then there is no reason to hold them. You've made it clear that you don't hold with this counsel of despair.

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Phineas J. Whoopee
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Re: I-Bonds for someone in their early 30s? pay taxes annual

Post by Phineas J. Whoopee » Mon Dec 17, 2012 11:17 pm

Epsilon Delta wrote:
Phineas J. Whoopee wrote:
Epsilon Delta wrote:
Phineas J. Whoopee wrote:
Little as I like to be contradictory ( :twisted:), what you say is certainly true in nominal terms, but the reason to own I Bonds is to keep up in real terms.
Since we're being contradictory:

That may be why you by I Bonds but I buy them because they offer the best prospects of return of alternatives with equal liquidity and credit risk.
Hi Epsilon Delta,

That's as good as any reason I can think of. It certainly seems as if realized inflation will likely be higher than break even less 70 bps (based on today's closing 10-year TIPS yield as reported by the Treasury, here:
http://www.treasury.gov/resource-center ... =realyield)
Epsilon Delta wrote:You're not entitled to a non-negative real return, and if you can't get one what are you going to do?
In today's environment the word "entitled" sounds like poison.
Epsilon Delta wrote:Taking your money home looks like a dead loss, some return is better than no return.
Where did that come from? I'm serious - I want you to provide a reference to something I've said, or something I've linked to.

In today's interest rate environment I have consistently advocated I Bonds for the safe part of one's portfolio, as does any thinking person.

Post the reference or delete the sentence.

PJW
Perhaps I read too much into "The reason to own I Bonds is to keep up in real terms". If that's the reason to hold I Bonds, and they don't keep up in real terms then there is no reason to hold them. You've made it clear that you don't hold with this counsel of despair.
Good. We agree.

Delete the sentence.

PJW

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Epsilon Delta
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Re: I-Bonds for someone in their early 30s? pay taxes annual

Post by Epsilon Delta » Mon Dec 17, 2012 11:43 pm

Phineas J. Whoopee wrote:
Epsilon Delta wrote:
Phineas J. Whoopee wrote:
Epsilon Delta wrote:
Phineas J. Whoopee wrote:
Little as I like to be contradictory ( :twisted:), what you say is certainly true in nominal terms, but the reason to own I Bonds is to keep up in real terms.
Since we're being contradictory:

That may be why you by I Bonds but I buy them because they offer the best prospects of return of alternatives with equal liquidity and credit risk.
Hi Epsilon Delta,

That's as good as any reason I can think of. It certainly seems as if realized inflation will likely be higher than break even less 70 bps (based on today's closing 10-year TIPS yield as reported by the Treasury, here:
http://www.treasury.gov/resource-center ... =realyield)
Epsilon Delta wrote:You're not entitled to a non-negative real return, and if you can't get one what are you going to do?
In today's environment the word "entitled" sounds like poison.
Epsilon Delta wrote:Taking your money home looks like a dead loss, some return is better than no return.
Where did that come from? I'm serious - I want you to provide a reference to something I've said, or something I've linked to.

In today's interest rate environment I have consistently advocated I Bonds for the safe part of one's portfolio, as does any thinking person.

Post the reference or delete the sentence.

PJW
Perhaps I read too much into "The reason to own I Bonds is to keep up in real terms". If that's the reason to hold I Bonds, and they don't keep up in real terms then there is no reason to hold them. You've made it clear that you don't hold with this counsel of despair.
Good. We agree.

Delete the sentence.

PJW
No, learn to write more carefully.

Johm221122
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Re: I-Bonds for someone in their early 30s? pay taxes annual

Post by Johm221122 » Tue Dec 18, 2012 12:22 am

finley wrote:I bonds are not good investments if you consider that after both inflation and taxes, the return is very poor. However, emergency funds should not be an investment. It is about conserving principal and having it available whenever you need it. Not sure which is better over the long haul for an EF, but the i bond has the major benefit of conserving purchasing power and might yield a little interest on top of that (although currently it does not.)
What bonds would you consider a good investment at today's interest rate and how much more risk would you have to take to get it?
John

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Re: I-Bonds for someone in their early 30s? pay taxes annual

Post by papito23 » Tue Dec 18, 2012 12:36 pm

Tax-reporting of I-bonds was discussed here. I found it helpful Take a peek.
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Re: I-Bonds for someone in their early 30s? pay taxes annual

Post by finley » Tue Dec 18, 2012 9:10 pm

Johm221122 wrote:
finley wrote:I bonds are not good investments if you consider that after both inflation and taxes, the return is very poor. However, emergency funds should not be an investment. It is about conserving principal and having it available whenever you need it. Not sure which is better over the long haul for an EF, but the i bond has the major benefit of conserving purchasing power and might yield a little interest on top of that (although currently it does not.)
What bonds would you consider a good investment at today's interest rate and how much more risk would you have to take to get it?
John
I will not claim to know better bonds, but in my mind, an investment is something that increases purchasing power. Earning less than 1% after taxes and after inflation does not really increase purchasing power.

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Re: I-Bonds for someone in their early 30s? pay taxes annual

Post by Johm221122 » Wed Dec 19, 2012 1:16 am

finley wrote:
Johm221122 wrote:
finley wrote:I bonds are not good investments if you consider that after both inflation and taxes, the return is very poor. However, emergency funds should not be an investment. It is about conserving principal and having it available whenever you need it. Not sure which is better over the long haul for an EF, but the i bond has the major benefit of conserving purchasing power and might yield a little interest on top of that (although currently it does not.)
What bonds would you consider a good investment at today's interest rate and how much more risk would you have to take to get it?
John
I will not claim to know better bonds, but in my mind, an investment is something that increases purchasing power. Earning less than 1% after taxes and after inflation does not really increase purchasing power.
I bonds(and tips) are used for some as inflation hedge or I bonds can be used for safe money
We all want as much return from bonds as possible (safely possible) try this post
http://www.bogleheads.org/forum/viewtopic.php?t=71095
Mostly it is recommended to take your risk on equity side.Depending on your portfolio I bonds might not be for you
John

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Re: I-Bonds for someone in their early 30s? pay taxes annual

Post by finley » Wed Dec 19, 2012 8:10 am

Johm221122 wrote:
finley wrote:
Johm221122 wrote:
finley wrote:I bonds are not good investments if you consider that after both inflation and taxes, the return is very poor. However, emergency funds should not be an investment. It is about conserving principal and having it available whenever you need it. Not sure which is better over the long haul for an EF, but the i bond has the major benefit of conserving purchasing power and might yield a little interest on top of that (although currently it does not.)
What bonds would you consider a good investment at today's interest rate and how much more risk would you have to take to get it?
John
I will not claim to know better bonds, but in my mind, an investment is something that increases purchasing power. Earning less than 1% after taxes and after inflation does not really increase purchasing power.
I bonds(and tips) are used for some as inflation hedge or I bonds can be used for safe money
We all want as much return from bonds as possible (safely possible) try this post
http://www.bogleheads.org/forum/viewtopic.php?t=71095
Mostly it is recommended to take your risk on equity side.Depending on your portfolio I bonds might not be for you
John

I agree with everything you said, but the OP asked why the wiki stated I bonds were not a good investment. They are not a good investment because of such poor return after taxes and inflation. This does not mean they do not have a role in your portfolio. I guess this boils down a difference on how we define an investment.

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Re: I-Bonds for someone in their early 30s? pay taxes annual

Post by Johm221122 » Wed Dec 19, 2012 8:49 am

finley wrote:
Johm221122 wrote:
finley wrote:
Johm221122 wrote:
finley wrote:I bonds are not good investments if you consider that after both inflation and taxes, the return is very poor. However, emergency funds should not be an investment. It is about conserving principal and having it available whenever you need it. Not sure which is better over the long haul for an EF, but the i bond has the major benefit of conserving purchasing power and might yield a little interest on top of that (although currently it does not.)
What bonds would you consider a good investment at today's interest rate and how much more risk would you have to take to get it?
John
I will not claim to know better bonds, but in my mind, an investment is something that increases purchasing power. Earning less than 1% after taxes and after inflation does not really increase purchasing power.
I bonds(and tips) are used for some as inflation hedge or I bonds can be used for safe money
We all want as much return from bonds as possible (safely possible) try this post
http://www.bogleheads.org/forum/viewtopic.php?t=71095
Mostly it is recommended to take your risk on equity side.Depending on your portfolio I bonds might not be for you
John

I agree with everything you said, but the OP asked why the wiki stated I bonds were not a good investment. They are not a good investment because of such poor return after taxes and inflation. This does not mean they do not have a role in your portfolio. I guess this boils down a difference on how we define an investment.
Wiki says they may not be suitable investment if in 30 years you will be in high tax bracket and have to pay tax,I don't see any thing about poor return
john
Edit, to answer op's post I would use I bonds and wait to you need funds or 30 years and then pay tax

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Re: I-Bonds for someone in their early 30s? pay taxes annual

Post by finley » Wed Dec 19, 2012 1:54 pm

In reference to the example provided in the wiki, it states "This is equivalent to a real after-tax return of 0.088%/year." You can judge for yourself if this is a poor return.

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Re: I-Bonds for someone in their early 30s? pay taxes annual

Post by Johm221122 » Wed Dec 19, 2012 1:57 pm

finley wrote:In reference to the example provided in the wiki, it states "This is equivalent to a real after-tax return of 0.088%/year." You can judge for yourself if this is a poor return.
That is pretty close to most short term government bonds,but with I bonds it will change just wait 6 months.what is your EF returning?
John
Edit if long term I actually like EE better
http://www.bogleheads.org/forum/viewtop ... 0&t=106029

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Re: I-Bonds for someone in their early 30s? pay taxes annual

Post by Mel Lindauer » Fri Jan 04, 2013 8:18 pm

finley wrote:In reference to the example provided in the wiki, it states "This is equivalent to a real after-tax return of 0.088%/year." You can judge for yourself if this is a poor return.
That is the semi-annual rate. The annual rate is 1.76%.
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Re: I-Bonds for someone in their early 30s? pay taxes annual

Post by hollowcave2 » Fri Jan 04, 2013 8:44 pm

IMHO, I would not give up the tax deferral of savings bonds. That's one of their prime appeals.

Savings bonds earn interest for 30 years. You can wait for a good time to redeem them. If you were making a lot of money that puts you in a higher tax bracket, you would have no need to redeem them early. I'd take my chances.

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