I Bond question please

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island
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I Bond question please

Post by island » Fri Sep 06, 2013 9:42 pm

Hi all
Thinking of moving some cash from our bank money market into I bonds. Never had them before so reading up on it on the Treasury Direct site and was hoping you could weigh in on some details I'm not sure of.

Interest is deferred and don't have to pay tax until sold or until it stops paying interest, correct?

Annual limit is 10K per social security number and husband and I would both like to purchase the max this year, 20K. We consider it a joint investment, but in order to purchased the max each, how do we title them? I'm owner of one, he the other and we list each other as the beneficiary of each other's bond? Not co-owners of each, is that correct?

Reading the terms and rates and understand the rates adjust in 6 month intervals and the next change is Nov 1, 2013.
The inflation rate is currently .59%, prior to that .88%. I know you don't have a crystal ball, but do you think it's likely the downward trend will continue come Nov?
Just trying to decide if we should purchase now or wait until Nov.

Also, think we should buy in 10K increments or smaller? I don't anticipate using it anytime soon, but wondering if smaller amounts are better for tax purposes if cashing out later. Any recommendations on that from your own experience would be appreciated?
Still trying to wrap my head around all these investments that are new to me!

Thank you!

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pjstack
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Re: I Bond question please

Post by pjstack » Fri Sep 06, 2013 9:56 pm

I would list yourselves as co-owners. Your social security number for the first $10K and his for the second $10k.
pjstack

Iorek
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Re: I Bond question please

Post by Iorek » Fri Sep 06, 2013 10:10 pm

I don't think it really matters whether you are coowners or beneficiaries but someone once explained to me that if you are beneficiaries then in the event of death, you have a choice whether to treat the unrealized income as belonging to the estate or to the beneficiary and that might be slightly advantageous (vs. inheriting as a co-owner). I never tracked that down to confirm it further though.

I broke up my first purchase into small increments, but turns out Treasury Direct doesn't care. They only care about how much you own that was purchased on a given day (for purposes of calculating interest). If you ever want to redeem, you can redeem in chunks as small as $25 (IIRC) regardless of how much you purchase at a time.

Yes, interest is deferred until you cash out.

I think it doesn't really matter whether you purchase now or wait, if you are planning to hold for a while. IIRC, if you purchase now you will get the current interest rate for six months, then get the next interest rate for six months, whatever it is, so the only difference is when you start earning interest, and how soon you start earning the next rate of interest.

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island
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Re: I Bond question please

Post by island » Fri Sep 06, 2013 11:40 pm

Pjstack- Thanks for confirming that. Want to do what's easiest and that's probably co-ownership unless there is a good reason not to.


Iorek wrote:I don't think it really matters whether you are coowners or beneficiaries but someone once explained to me that if you are beneficiaries then in the event of death, you have a choice whether to treat the unrealized income as belonging to the estate or to the beneficiary and that might be slightly advantageous (vs. inheriting as a co-owner). I never tracked that down to confirm it further though.
Hmmm something to think about there.

I broke up my first purchase into small increments, but turns out Treasury Direct doesn't care. They only care about how much you own that was purchased on a given day (for purposes of calculating interest). If you ever want to redeem, you can redeem in chunks as small as $25 (IIRC) regardless of how much you purchase at a time.
Oh I didn't realize that. Even if it's 10K I don't have to cash it all out at once? Does that create a nightmare where you have to calculate partial interest and the tax that goes with it?

Yes, interest is deferred until you cash out. Thanks

I think it doesn't really matter whether you purchase now or wait, if you are planning to hold for a while. IIRC, if you purchase now you will get the current interest rate for six months, then get the next interest rate for six months, whatever it is, so the only difference is when you start earning interest, and how soon you start earning the next rate of interest. Duh, not locked in because rate still changes in Nov even if I purchase now! Of course! I'm not clicking on all cylinders. Thank you Lorek for tactfully restating how it works without making me feel like an idiot!

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Re: I Bond question please

Post by #Cruncher » Sat Sep 07, 2013 2:49 am

island wrote:Reading the terms and rates and understand the rates adjust in 6 month intervals and the next change is Nov 1, 2013. ... Just trying to decide if we should purchase now or wait until Nov.
You are correct, Island, the rate does change every six months. But you should also be aware that this rate, known as the composite rate (currently 1.18%) is composed of two parts:
  • Fixed rate is set when you buy the I Bond and doesn't change while you own it. Currently it is 0%.
  • Semi-annual inflation rate changes every six months after the month you buy. Currently it is 0.59%.
Read How does Treasury figure the I Bond interest rate? for more information. You can see the effect purchase month can make by comparing the historical return of an I Bond bought in November 2008 when the fixed rate was 0.7% to one bought in September 2008 when the fixed rate was 0%. A $10,000 purchase in September 2008 has grown to $11,420 today. But a $10,000 purchase two months later in November 2008 has grown to $11,536 today. The difference would have been even more, except that the November purchase missed out on the initial high 2.42% semi-annual inflation rate that the September purchase earned for the first six months. But the current 0.59% semi-annual inflation rate is quite low; so missing out on it is no real disadvantage.

It's unlikely the fixed rate to become effective November 1st will increase from 0%. But if the recent run up in TIPS interest rates continues, it is possible. At the current 1.18% composite rate you'd earn only $20 the next two months on a $10,000 purchase. (See $10,000 I Bond with 0.00% Fixed Rate Purchased September 2013.) Since you'd be giving up so little, I'd wait until November to purchase. If the fixed rate does happen to rise above 0%, you'll benefit for as long as you hold the I Bond -- potentially up to 30 years. If it stays at 0%, you and your husband will have lost only $40 by waiting.

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Re: I Bond question please

Post by MooseandBear » Sat Sep 07, 2013 5:55 am

I believe I had read in prior posts on here that the maximum I-bond that can be purchased directly through the treasury is $10K per social security but that you can also purchase I bonds with your tax return refund. So you could over-withhold your payroll taxes or overpay estimated taxes and then use that money to buy additional I-bonds. I believe that the limit was an additional $5K / tax return through this method.

I hope that someone else will confirm or correct my memory on this.

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Re: I Bond question please

Post by Iorek » Sat Sep 07, 2013 7:18 am

I haven't redeemed any i-bonds on Treasury Direct but my impression is that when you do redeem they will send you a tax form indicating how much interest you earned on the redeemed bond, so figuring out your taxes shouldn't be hard.

#Cruncher raises an interesting point re: the fixed rate. I too think it's unlikely that the fixed rate will increase in Nov., but it's possible.

You can get up to $5k in paper ibonds as a refund on your taxes (although note that they will be small denomination bonds). Once I had a TD account I found it's hard to go back to paper bonds (with the possibility of losing them, and having to track them in savings bond wizard if you want to know what they are worth), but YMMV.

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Re: I Bond question please

Post by Spirit Rider » Sat Sep 07, 2013 8:26 am

island wrote:Interest is deferred and don't have to pay tax until sold or until it stops paying interest, correct?
Interest on IBonds are deferred by "default", but you can elect to change from deferred (cash basis accounting) to annual (accrual basis accounting). You would then have to report and pay taxes on all current deferred interest and then report and pay taxes on the annual interest until maturity or redemption.

Selecting annual (accrual basis accounting) can make sense for IBonds held by minors, as long as they don't have substantial investment income. By reporting annually, they pay 0% on the 1st $1K, their own tax rate (which may very likely be 0%) on the next $1K, and the parents rate on the rest. Then when the minor is an adult with a higher marginal tax rate, switch back to deferred (cash basis accounting).

A couple of additional points. Many people would not want the hassle, because you have to calculate your annual interest yourself, the IRS does not report this to you. The switch from deferred to annual reporting is automatic, by the reporting of any current deferred interest. You must request from the IRS to switch back from annual to deferred, but it is automatically granted.

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Mel Lindauer
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Re: I Bond question please

Post by Mel Lindauer » Sat Sep 07, 2013 11:22 am

MooseandBear wrote:I believe I had read in prior posts on here that the maximum I-bond that can be purchased directly through the treasury is $10K per social security but that you can also purchase I bonds with your tax return refund. So you could over-withhold your payroll taxes or overpay estimated taxes and then use that money to buy additional I-bonds. I believe that the limit was an additional $5K / tax return through this method.

I hope that someone else will confirm or correct my memory on this.
That's correct. The I Bonds purchased with a tax refund are paper I Bonds and will arrive in a number of smaller denominations.
Best Regards - Mel | | Semper Fi

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Mel Lindauer
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Re: I Bond question please

Post by Mel Lindauer » Sat Sep 07, 2013 11:24 am

Iorek wrote:I haven't redeemed any i-bonds on Treasury Direct but my impression is that when you do redeem they will send you a tax form indicating how much interest you earned on the redeemed bond, so figuring out your taxes shouldn't be hard.
That's not correct. TD does not "send you a tax form indicating how much interest you earned on the redeemed bond". The 1099 is available online, but it's up to you to remember to print it out.
Best Regards - Mel | | Semper Fi

DickBenson
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Re: I Bond question please

Post by DickBenson » Sat Sep 07, 2013 5:27 pm

island wrote: Just trying to decide if we should purchase now or wait until Nov.
If you wait until the middle of October the new inflation rate on the November I bonds will be known. If it is greater than the present inflation rate, then you could wait and purchase the bonds in November. If it is less than the present inflation rate, then there still would be time to purchase the October bonds with the higher rate (and be valid for the following 6 months). This new inflation rate is usually posted on this forum the day of the announcement.

Also, in the middle of this month, we will know the inflation numbers for 5 of the 6 months used in the calculation. So, there probably will be some posts on an estimation of the new rates in a week or so.

Dick

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Phineas J. Whoopee
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Re: I Bond question please

Post by Phineas J. Whoopee » Sun Sep 08, 2013 12:10 pm

Mel Lindauer wrote:
MooseandBear wrote:I believe I had read in prior posts on here that the maximum I-bond that can be purchased directly through the treasury is $10K per social security but that you can also purchase I bonds with your tax return refund. So you could over-withhold your payroll taxes or overpay estimated taxes and then use that money to buy additional I-bonds. I believe that the limit was an additional $5K / tax return through this method.

I hope that someone else will confirm or correct my memory on this.
That's correct. The I Bonds purchased with a tax refund are paper I Bonds and will arrive in a number of smaller denominations.
If I may, that was correct. It's unknown whether the opportunity will persist.

The IRS website has a draft 2013 form 8888 (used to request the I Bonds), which does show the option, but the cover page says not to rely on the draft.

I'm interested in this subject and check for the final form 8888 from time to time. I suspect the option will be available for the 2013 tax year, but suspicion is not knowledge.

PJW

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Mel Lindauer
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Re: I Bond question please

Post by Mel Lindauer » Sun Sep 08, 2013 12:48 pm

Phineas J. Whoopee wrote:
Mel Lindauer wrote:
MooseandBear wrote:I believe I had read in prior posts on here that the maximum I-bond that can be purchased directly through the treasury is $10K per social security but that you can also purchase I bonds with your tax return refund. So you could over-withhold your payroll taxes or overpay estimated taxes and then use that money to buy additional I-bonds. I believe that the limit was an additional $5K / tax return through this method.

I hope that someone else will confirm or correct my memory on this.
That's correct. The I Bonds purchased with a tax refund are paper I Bonds and will arrive in a number of smaller denominations.
If I may, that was correct. It's unknown whether the opportunity will persist.

The IRS website has a draft 2013 form 8888 (used to request the I Bonds), which does show the option, but the cover page says not to rely on the draft.

I'm interested in this subject and check for the final form 8888 from time to time. I suspect the option will be available for the 2013 tax year, but suspicion is not knowledge.

PJW
I agree that this option of getting paper I Bonds via one's tax refund could go away at any time. I've stated previously here on the forum and in my Forbes columns that I expect this option to disappear whenever they run out of the current stock of paper I Bonds. I hope I'm wrong, but all the evidence points to total elimination of paper I Bonds.
Best Regards - Mel | | Semper Fi

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island
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Re: I Bond question please

Post by island » Sun Sep 15, 2013 4:02 pm

I didn't realize one could exceed the annual purchase limit if buying with IRS tax refund. Good to know! Thanks for that and all the additional info.

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Re: I Bond question please

Post by Kevin M » Sun Sep 15, 2013 4:24 pm

You can also purchase $10K per year for your living trust using an "entity account" at TD. You can easily set up a living trust using the Nolo Press book. So, between husband and wife, $30K per year. If only using for I Bond purchases, maybe you could each have your own trust and buy a total of $40K per year.

Kevin
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island
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Re: I Bond question please

Post by island » Sun Sep 15, 2013 8:04 pm

Kevin M wrote:You can also purchase $10K per year for your living trust using an "entity account" at TD. You can easily set up a living trust using the Nolo Press book. So, between husband and wife, $30K per year. If only using for I Bond purchases, maybe you could each have your own trust and buy a total of $40K per year.

Kevin
Huh? :confused You lost me Kevin. I don't know what an entity account is or how it works with a trust. Can you refer me to something to read about it other than my random Google searches?
Thanks.

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Kevin M
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Re: I Bond question please

Post by Kevin M » Sun Sep 15, 2013 8:20 pm

island, just go to TreasuryDirect.gov and search on "entity account". Click the first link. Note that trust is listed. Click that link if you want to learn more.

I have an entity account at TD, and buy the max for my trust in it each year. It's easy.

Kevin
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island
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Re: I Bond question please

Post by island » Sun Sep 15, 2013 8:27 pm

Great thanks Kevin. We're meeting with an attorney this Fri to set up a trust, pour over will and all that other stuff that goes with it so good timing for this info. Appreciate it.

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Re: I Bond question please

Post by neofight » Tue Sep 17, 2013 5:23 pm

Anyone know how to actually purchase the annual limit of IBonds for a couple, with both husband + spouse as co-owners?

Basically I am trying to purchase 20k of IBonds, 10k under my SSN and 10k under my wife's SSN. I would like to have the IBonds registered with both of us as registrants (co-owners) not just beneficiaries, so that both of us are considered owners and on death of one of spouse, the surviving spouse becomes sole owner. There doesn't seem to be a spot to mention whose SSN to count the purchase against when purchasing the IBonds, so I assume it uses the SSN from the registration - and I see no way to tell it to use the second-named registrant rather than the first-named one, for the second batch of 10k purchases. I think that this means I need to have two separate registrations, one listing 'me WITH wife' and one listing 'wife WITH me'.

I set up a new registration with me as the first-named registrant and my wife as the second-named registrant. This worked fine. However, when I try to set up the reverse registration, my wife as the first-named registrant and me as the second-named registrant, it gives me an error saying 'If this is not a gift registration, you must be named as the first-named registrant'. I tried checking 'This is a gift', but then it gives me the error 'You may not register this security in your name and designate it as a gift.'

I called the phone line for TD, and the customer service rep said that this should be possible, but was not able to say why it wasn't working. She suggested I send a question in online, which I did - with no response. I would prefer to NOT have to establish another Treasury Direct online account for my wife, since this one is already linked to our joint account and it would be simpler to just manage it all from one place. I assume this is a pretty common need, how are you guys setting up your TD IBond purchases?

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Phineas J. Whoopee
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Re: I Bond question please

Post by Phineas J. Whoopee » Tue Sep 17, 2013 5:34 pm

neofight wrote:Anyone know how to actually purchase the annual limit of IBonds for a couple, with both husband + spouse as co-owners?

Basically I am trying to purchase 20k of IBonds, 10k under my SSN and 10k under my wife's SSN. I would like to have the IBonds registered with both of us as registrants (co-owners) not just beneficiaries, so that both of us are considered owners and on death of one of spouse, the surviving spouse becomes sole owner. There doesn't seem to be a spot to mention whose SSN to count the purchase against when purchasing the IBonds, so I assume it uses the SSN from the registration - and I see no way to tell it to use the second-named registrant rather than the first-named one, for the second batch of 10k purchases. I think that this means I need to have two separate registrations, one listing 'me WITH wife' and one listing 'wife WITH me'.

I set up a new registration with me as the first-named registrant and my wife as the second-named registrant. This worked fine. However, when I try to set up the reverse registration, my wife as the first-named registrant and me as the second-named registrant, it gives me an error saying 'If this is not a gift registration, you must be named as the first-named registrant'. I tried checking 'This is a gift', but then it gives me the error 'You may not register this security in your name and designate it as a gift.'

I called the phone line for TD, and the customer service rep said that this should be possible, but was not able to say why it wasn't working. She suggested I send a question in online, which I did - with no response. I would prefer to NOT have to establish another Treasury Direct online account for my wife, since this one is already linked to our joint account and it would be simpler to just manage it all from one place. I assume this is a pretty common need, how are you guys setting up your TD IBond purchases?
Your wife needs her own Treasury Direct account. Then she can buy them for herself naming you as co-owner. You can set each other up with read access to the other's account. Sorry, I know that's what you said you don't want to do, but it's the way it is.
PJW

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Kevin M
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Re: I Bond question please

Post by Kevin M » Tue Sep 17, 2013 5:59 pm

Yes, one TD account per "person". I have a separate entity account for my living trust, just like your wife needs a separate TD account to buy her allocation of I Bonds. For a couple with a living trust, that's three accounts.

Kevin
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neofight
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Re: I Bond question please

Post by neofight » Tue Sep 17, 2013 6:22 pm

Thanks for the quick answers, more accounts it is!

Topic Author
island
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Re: I Bond question please

Post by island » Sun Nov 03, 2013 5:44 pm

Thanks for the additional info everyone.
Husband and I set up our TD accounts today, transfered money to the bank account we linked them to and when that posts we'll purchase 10K for each. Will consider purchasing more in the name of our trust when that's set up or if we're due a tax refund.

Any advise on what denominations to request?
Better to purchase single 10K bonds or in small denominations incase we have to cash some? I don't anticipate needing the $ before maturity, but you never know and if the rates go up significantly in a few years it might be better to cash them in and purchase again or there may be some other strategies, ramifications, tax consequences I may not be aware of?? Suggestions?

Thank you! :D

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Re: I Bond question please

Post by taegirain3 » Sun Nov 03, 2013 5:49 pm

You can redeem partial bonds, so you don't need to buy many small bonds; one 10K one should suffice.

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Mel Lindauer
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Re: I Bond question please

Post by Mel Lindauer » Sun Nov 03, 2013 6:43 pm

island wrote:Thanks for the additional info everyone.
Husband and I set up our TD accounts today, transfered money to the bank account we linked them to and when that posts we'll purchase 10K for each. Will consider purchasing more in the name of our trust when that's set up or if we're due a tax refund.

Any advise on what denominations to request?
Better to purchase single 10K bonds or in small denominations incase we have to cash some? I don't anticipate needing the $ before maturity, but you never know and if the rates go up significantly in a few years it might be better to cash them in and purchase again or there may be some other strategies, ramifications, tax consequences I may not be aware of?? Suggestions?

Thank you! :D
You can purchase 10k and still redeem any amount you want as long as it's $25 or more and you leave at least $25 in your account. In fact, you could redeem odd amounts like $48.42 if you wanted.
Best Regards - Mel | | Semper Fi

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