Is there such thing as too young for IBonds

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xrw1
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Is there such thing as too young for IBonds

Post by xrw1 » Thu Jan 10, 2013 11:24 am

Hi everyone,

The past year has been good and I have taken action to a lot the advice I have been given on this forum.

I am currently 26 and have a an asset allocation of 80% stocks (70% domestic, 30% international), 20% bonds.

A while ago I was thinking about opening up a taxable account, but more recently I have been reading more about Ibonds. I was wondering do you think it is too early to buy Ibonds?

I have no debts right now, (car and student loans paid off) but I do plan on buying either a condo or house in hopefully 1-2 years. I already have a 1 year emergency fund. I also have a separate savings account for the downpayment I would need for when I would buy the house/condo, but that account isn't too big right now (~ $ 4K)

With the extra ~100 dollars every month, should I buy IBonds or invest more into domestic/internation index funds in the taxable account.

thank you everyone

Valuethinker
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Re: Is there such thing as too young for IBonds

Post by Valuethinker » Thu Jan 10, 2013 11:31 am

xrw1 wrote:Hi everyone,

The past year has been good and I have taken action to a lot the advice I have been given on this forum.

I am currently 26 and have a an asset allocation of 80% stocks (70% domestic, 30% international), 20% bonds.

A while ago I was thinking about opening up a taxable account, but more recently I have been reading more about Ibonds. I was wondering do you think it is too early to buy Ibonds?

I have no debts right now, (car and student loans paid off) but I do plan on buying either a condo or house in hopefully 1-2 years. I already have a 1 year emergency fund. I also have a separate savings account for the downpayment I would need for when I would buy the house/condo, but that account isn't too big right now (~ $ 4K)

With the extra ~100 dollars every month, should I buy IBonds or invest more into domestic/internation index funds in the taxable account.

thank you everyone

Ibonds are a great investment you are never too young to start accumulating an inflation proof asset.

However they are a *long term* investment. Would you not be better of saving for the downpayment in CDs? Another couple of thousand in that downpayment account will improve your position in buying a home.

centrifuge41
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Re: Is there such thing as too young for IBonds

Post by centrifuge41 » Thu Jan 10, 2013 11:32 am

Thinking about opening a taxable account. Does that mean that you've maxed out 401k and Roth IRA, if applicable? Do you have high deductible health insurance as well?

The Roth IRA, 401k, and HSA should be maxed out before any taxable investing or I Bonds. But if you are maxed out on the former 3, then sure, you can think about I bonds (and/or a taxable account).

Grt2bOutdoors
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Re: Is there such thing as too young for IBonds

Post by Grt2bOutdoors » Thu Jan 10, 2013 11:32 am

It is never too early to save money. You purchase investments on the basis of your goals. Let's say you desire an inflation linked component, you think/know TIPs are too expensive or volatile for your taste - next best investment is I bonds. In fact, that is the case today and I bonds permit you to defer the interest in a taxable location, not so with Tips.

Buy em, put em away, when you need the money, it will be there. The same can not be said for the value of investments in the equities markets - it almost always fluctuates.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

swaption
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Re: Is there such thing as too young for IBonds

Post by swaption » Thu Jan 10, 2013 12:11 pm

Not too young at all and chances are it is the right thing to do. Given the choices you lay out, I would invest in I Bonds before putting any after tax money into index funds, but I'm not sure that gets to the big picture. If this is part of your savings for your down payment, then index funds should never have been a consideration in the first place. But no matter what you have in mind, I Bonds should work. Look at the following:

Long Term Portfolio Allocation: Even though the conventional wisdom is not to put bonds in taxable accounts, I Bonds are actually extremely tax efficient by deferring all taxes. The 0% real return is much better than current levels for TIPS or the expected return from treasuries, and I Bonds come with a put option at par.

Down Payment: Better expected yield than most alternatives and no current tax. Also improves to the extent the purchase is delayed since there is no longer any early redemption penalty.

Emergency Fund: You can buy them now, and then consider them as part of your emergency fund once they can be redeemed. Likely a better yield than whatever your emergency fund is invested in, with no current tax.

In all the cases above, I Bonds come with the long term option of being tax free if used for education purposes, which perhaps may be relevant for you within the 30 year maturity.

In my case I bought 3.4% I Bonds as part of my emergency fund about a decade ago. They are now part of my long term portfoio for obvious reasons. So basically, there is likely a place for them now, although that place can change down the road based on your overall circumstances.

sscritic
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Re: Is there such thing as too young for IBonds

Post by sscritic » Thu Jan 10, 2013 12:19 pm

I gave my granddaughters I bonds at birth. They were not too young.

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HueyLD
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Re: Is there such thing as too young for IBonds

Post by HueyLD » Thu Jan 10, 2013 12:24 pm

sscritic wrote:I gave my granddaughters I bonds at birth. They were not too young.
Can you still give them paper I bonds, or do you have to give them electronic I bonds nowadays?

sscritic
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Re: Is there such thing as too young for IBonds

Post by sscritic » Thu Jan 10, 2013 12:30 pm

Past tense. I also lied. I cheated the last one. Well, not really a lie; I gave them I bonds, just not all of them.

I don't have a TD account (nor do my children) so they don't have minor linked accounts.

Grt2bOutdoors
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Re: Is there such thing as too young for IBonds

Post by Grt2bOutdoors » Thu Jan 10, 2013 12:50 pm

HueyLD wrote:
sscritic wrote:I gave my granddaughters I bonds at birth. They were not too young.
Can you still give them paper I bonds, or do you have to give them electronic I bonds nowadays?
Yes - overfund your taxes, then come filing time, request your refund in the form of paper I bonds made payable to them.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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HueyLD
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Re: Is there such thing as too young for IBonds

Post by HueyLD » Thu Jan 10, 2013 12:53 pm

Grt2bOutdoors wrote:
HueyLD wrote:
sscritic wrote:I gave my granddaughters I bonds at birth. They were not too young.
Can you still give them paper I bonds, or do you have to give them electronic I bonds nowadays?
Yes - overfund your taxes, then come filing time, request your refund in the form of paper I bonds made payable to them.
What a great idea. Why didn't I think of that?? :oops:

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g$$
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Re: Is there such thing as too young for IBonds

Post by g$$ » Thu Jan 10, 2013 1:02 pm

I'll take the opposite point of view.

I -bonds mature in 30 years. You will be 56 at that time... likely in your peak earning years. Do you really want a large taxable payment at that time?

sscritic
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Re: Is there such thing as too young for IBonds

Post by sscritic » Thu Jan 10, 2013 1:07 pm

His goal may be to be retired by 56 and be ready to live off sales of stocks and redemptions of I bonds until 59 1/2.

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Re: Is there such thing as too young for IBonds

Post by Grt2bOutdoors » Thu Jan 10, 2013 1:47 pm

g$$ wrote:I'll take the opposite point of view.

I -bonds mature in 30 years. You will be 56 at that time... likely in your peak earning years. Do you really want a large taxable payment at that time?
Ah yes, but I-bonds can also be redeemed any time after the minimum 1 year holding period. You buy $10K today and you systematically liquidate at your leisure. Hard to imagine you will have such substantial taxes to pay as a result of the I-bonds.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

xrw1
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Re: Is there such thing as too young for IBonds

Post by xrw1 » Thu Jan 10, 2013 1:57 pm

A few updates on my part:

I have maxed out roth every year, maxed out 401K last year, I am planning to max out 401K this year.

I don't really have the intention of using my IBonds for my downpayment. I have a ING account that is slowly growing ($ 4k) right now for my downpayment.

I think everyone wants and dreams of retiring early, but I don't plan on retiring at 56. I think I will work till ~65 if possible.

I know I could put the extra 100 dollars towards my downpayment, but I want to invest that 100 dollars every month. That is why i couldn't decide on taxable or Ibond.

I think I will invest in Ibond, I do like the fact they defer taxes and if i use them for my kids college, it will be tax free. But now the question is Ibond or EE bond... I just don't know if I can hold them for 20 years. I can not predict if I would need to sell the bonds for an unexpected event.

bdpb
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Re: Is there such thing as too young for IBonds

Post by bdpb » Thu Jan 10, 2013 5:31 pm

xrw1 wrote:A few updates on my part:

I have maxed out roth every year, maxed out 401K last year, I am planning to max out 401K this year.

I don't really have the intention of using my IBonds for my downpayment. I have a ING account that is slowly growing ($ 4k) right now for my downpayment.

I think everyone wants and dreams of retiring early, but I don't plan on retiring at 56. I think I will work till ~65 if possible.

I know I could put the extra 100 dollars towards my downpayment, but I want to invest that 100 dollars every month. That is why i couldn't decide on taxable or Ibond.

I think I will invest in Ibond, I do like the fact they defer taxes and if i use them for my kids college, it will be tax free. But now the question is Ibond or EE bond... I just don't know if I can hold them for 20 years. I can not predict if I would need to sell the bonds for an unexpected event.
If you are still working when you redeem the bonds you will pay taxes at your marginal rate at that time. Probably your peak earning years.

If you have saved enough and retire at 56, you would probably prefer to convert IRA assets to Roth instead of paying taxes on the bonds.

Under current law, if you earn too much, they will not be tax free for education.

If you have plenty of space for bonds in your IRA and 401k, then it's probably better to invest in total market stock index funds in your taxable account and fill your IRA/401k with bonds.

sscritic
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Re: Is there such thing as too young for IBonds

Post by sscritic » Thu Jan 10, 2013 5:46 pm

bdpb wrote: If you are still working when you redeem the bonds you will pay taxes at your marginal rate at that time. Probably your peak earning years.
You can pay taxes every year, some of which will be peak and some of which won't. They can't all be peak. Redemption has nothing to do with when you pay taxes, other than you can't delay past redemption.
bdpb wrote: If you have saved enough and retire at 56, you would probably prefer to convert IRA assets to Roth instead of paying taxes on the bonds.
And where is this magical money coming from to pay the taxes on the Roth conversion? From redeeming I bonds of course. :)
[If you convert, you pay tax on the whole thing. On the I bond, you pay tax only on the increase not already taxed.]

bdpb
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Re: Is there such thing as too young for IBonds

Post by bdpb » Thu Jan 10, 2013 7:05 pm

sscritic wrote:
bdpb wrote: If you are still working when you redeem the bonds you will pay taxes at your marginal rate at that time. Probably your peak earning years.
You can pay taxes every year, some of which will be peak and some of which won't. They can't all be peak. Redemption has nothing to do with when you pay taxes, other than you can't delay past redemption.
bdpb wrote: If you have saved enough and retire at 56, you would probably prefer to convert IRA assets to Roth instead of paying taxes on the bonds.
And where is this magical money coming from to pay the taxes on the Roth conversion? From redeeming I bonds of course. :)
[If you convert, you pay tax on the whole thing. On the I bond, you pay tax only on the increase not already taxed.]
True about paying taxes every year, but you can defer the taxes if bonds are held in a tax preferred account. Kind of thought that was the OP's intent, to defer taxes. He didn't say he was using them for short term savings. Hopefully his peak earning years will rise until retirement.

How about using the magical money from the stock funds to pay the conversion taxes?

sscritic
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Re: Is there such thing as too young for IBonds

Post by sscritic » Thu Jan 10, 2013 7:18 pm

bdpb wrote:Kind of thought that was the OP's intent, to defer taxes.
With the extra ~100 dollars every month, should I buy IBonds or invest more into domestic/internation index funds in the taxable account.
I guess buying stock funds defers taxes, but not on the dividends. And there are only taxes to defer if the funds go up. If the funds go down, well, that's another story (Is TLH considered deferring taxes?). It is hard to TLH I bonds, so the best deal is to buy stocks and hope they go down to zero so you can get the biggest benefit from your TLH. That is the best way to defer taxes, especially if your stocks stay at zero. :)

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Liquid
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Re: Is there such thing as too young for IBonds

Post by Liquid » Thu Jan 10, 2013 8:07 pm

Taxable stocks should provide considerably higher returns than ibonds over a long investing career. Only you can decide how much you value safety of your initial (small) contributions vs growth of said contributions.

bdpb
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Re: Is there such thing as too young for IBonds

Post by bdpb » Thu Jan 10, 2013 8:30 pm

I'm not suggesting buying stocks instead of bonds. Just locate your stocks and bonds in the right accounts.

Generally, bonds in tax deferred accounts, stocks in taxable. If you don't have room for bonds in tax deferred, then buy muni bonds or Ibonds in taxable.

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FNK
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Re: Is there such thing as too young for IBonds

Post by FNK » Thu Jan 10, 2013 9:48 pm

xrw1 wrote:I know I could put the extra 100 dollars towards my downpayment, but I want to invest that 100 dollars every month.
Weird. I'd focus on the downpayment if I were you. $100/month is small change if you're maxing out tax advantaged accounts.

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Rainier
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Re: Is there such thing as too young for IBonds

Post by Rainier » Thu Jan 10, 2013 9:52 pm

sscritic wrote: I guess buying stock funds defers taxes, but not on the dividends. And there are only taxes to defer if the funds go up. If the funds go down, well, that's another story (Is TLH considered deferring taxes?). It is hard to TLH I bonds, so the best deal is to buy stocks and hope they go down to zero so you can get the biggest benefit from your TLH. That is the best way to defer taxes, especially if your stocks stay at zero. :)
If he's in the 15% tax bracket then there are no taxes on dividends and capital gains.

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