I Bonds as part of a portfolio

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berg
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I Bonds as part of a portfolio

Post by berg » Thu Nov 14, 2013 10:56 am

I currently max my 401k and wife's 403b. Additionally we do backdoor roth's. I'm 30 and she is 28. I also am beginning to invest an additional $500 per paycheck ($13k annually) into a taxable account.

I'm wondering if I should look to buy I Bonds part of the bond portion of my portfolio. Right now my retirement assets stand at around $170k, with 6% in Bonds. I have upping my Bond allocation this year after doing more research and realizing I was too weighted in equities. My goal that I am working toward through contributions is to get to about 10% Bonds.

I was reading about I Bonds and wondering if I should consider these and if it would make sense to use these as part of my Bond allocation. I tried to find threads on this, but I got quickly confused. If I bought $10k of I Bonds for my wife and I for 2013, my allocation would shoot up to about 16% bonds, which would allow me to focus on equities in my retirement accounts. Of course, I'd want to keep some Bonds in my retirement accounts so that in the event of downturn I could use the Bonds to rebalance into discounted equities.

I think where I'm getting confused is are the I Bonds an additional good investment for retirement? Given that after a 1 year they could be an emergency fund, should I not really consider it part of the Bond portion, but more of my cash portion? Why or why not? And if I think I might want to use the cash for something in the 5 to 10 year range, would it make no sense to do this and simply leave it in CD's or something like that?

Thanks!

Khanmots
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Re: I Bonds as part of a portfolio

Post by Khanmots » Thu Nov 14, 2013 11:05 am

A "Retirement Account" is anything that you want to store money intended for retirement in.

That said, a lot of people use the phrase to mean one of the special kinds of accounts that have tax advantages if used for retirement (i.e., 401k, IRA, etc)... which makes for confusion :(

I-Bonds are interesting because they are tax-advantaged (you can defer payment of taxes on the interest until redemption), but are not tied to retirement. Because of this and because they're also tied to inflation, many people like to make use of them as a holder for an emergency fund. We also have quite a few people that once they have their emergency fund needs met will use them to hold some or all of their bond allocation as well. They just make mental (or physical) note that those bonds are for retirement. Same as people do with standard non-tax advantaged brokerage or mutual fund accounts.

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kingsnake
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Re: I Bonds as part of a portfolio

Post by kingsnake » Thu Nov 14, 2013 11:08 am

I think they stop bearing interest after 30 years? ie. depending on when you retire you may have to redeem some of them prior to retirement.

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Mel Lindauer
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Re: I Bonds as part of a portfolio

Post by Mel Lindauer » Thu Nov 14, 2013 11:14 am

Since you're 30, the earliest bonds would reach final maturity when you're in your late 50s to age 60. Unless you plan to retire by then, you'll likely be in your peak earning years and, therefore be in a high tax bracket. If you do plan to retire early, then the I Bonds could provide a nice bridge to Social Security.

Remember, too, that the I Bonds could be used tax-free for qualifying educational expenses for you, your wife or your children.
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Manks
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Re: I Bonds as part of a portfolio

Post by Manks » Thu Nov 14, 2013 1:51 pm

OP, I am in a very similar situation as you. I purchased my first Ibonds this year. However, my purpose for them will be as months 3-6 of my emergency fund. Therefore, I am woring on increasing my bond allocation in my retirement accounts since I am not counting the Ibonds toward the 10%.

sport
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Re: I Bonds as part of a portfolio

Post by sport » Thu Nov 14, 2013 2:08 pm

DAK wrote:I think they stop bearing interest after 30 years? ie. depending on when you retire you may have to redeem some of them prior to retirement.
Yes, they stop earning interest after 30 years. At that time, income tax on the interest is due, whether or not you redeem the bonds. The only exceptions to this would be if you paid the taxes yearly, or used them as allowed for education expenses.
Jeff

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BrandonBogle
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Re: I Bonds as part of a portfolio

Post by BrandonBogle » Thu Nov 14, 2013 2:09 pm

Mel Lindauer wrote:Since you're 30, the earliest bonds would reach final maturity when you're in your late 50s to age 60. Unless you plan to retire by then, you'll likely be in your peak earning years and, therefore be in a high tax bracket. If you do plan to retire early, then the I Bonds could provide a nice bridge to Social Security.
This is my plan. I am currently planning for ER at 52 (30 currently) and will use iBonds + Taxable to bridge the gap to SS.

I also plan to do Traditional 401k -> Roth IRA conversions (and, if necessary by the laws of the time, a short stint in a Traditional IRA to facilitate the Roth Conversion) up to the top of the 15% bracket. This part though would, of course, be dependent on the tax laws at that time.

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dratkinson
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Re: I Bonds as part of a portfolio

Post by dratkinson » Thu Nov 14, 2013 2:46 pm

Please read the bond books by Swedroe and Thau for a good overview of the bond topic. Pay special attention to the sections on tax-exempt bonds/funds.

TE bonds go in a taxable account, thus freeing up place in your tax-advantaged accounts for higher-growth and tax-inefficient equities.

TE bond funds do not have an annual purchase limit, so you could close in on your ideal bond allocation more quickly than by using I bonds.

Bond funds automatically roll over their holdings, your I bond holdings will not. So buy once and forget it... except for recording the monthly fed tax-free distributions. (You will owe state taxes on the distributions.)

For the past few years, the yield from TE bonds (IT and LT) has been higher than the after-tax yield of the total bond market fund (VBMFX).

The holding period to tax lost harvest TE bonds is much longer than for equities (>half-year vs >30-days) if you go that route.

I've been happy using TE intermediate-term bond fund (VWIUX, Admiral shares) and TE long-term bond fund (VWLUX, Admiral shares) as my major bond holdings. To me, the shorter duration TE bond funds do not provide enough reward; would have greater principle protection and higher after-tax return with a bank CD.

You will need to read the bond books and decide for yourself.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

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wintermute
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Re: I Bonds as part of a portfolio

Post by wintermute » Thu Nov 14, 2013 3:29 pm

I use I-bonds for more tax deferred space. In other tax deferred spaces, I hold longer bonds to bring up my duration to about 5 years. The risk (duration) adjusted return of I-bonds may end up higher than say BND.

Does anyone know if TD auto-redeems electronic I-bonds? If they don't, you can hold onto them and delay redemption in retirement. You may also be able to do redemption and rebuy, if you have a bad year (income wise) between now and retirement.

dbr
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Re: I Bonds as part of a portfolio

Post by dbr » Thu Nov 14, 2013 4:02 pm

wintermute wrote:I use I-bonds for more tax deferred space. In other tax deferred spaces, I hold longer bonds to bring up my duration to about 5 years. The risk (duration) adjusted return of I-bonds may end up higher than say BND.

Does anyone know if TD auto-redeems electronic I-bonds? If they don't, you can hold onto them and delay redemption in retirement. You may also be able to do redemption and rebuy, if you have a bad year (income wise) between now and retirement.
My understanding is that they stay there until you redeem them, even forever, but at the end of 30 years they stop paying interest and the deferred tax comes due unless you have elected annual tax payments (no deferral). I assume they send in a 1099 after that 30th year?

placeholder
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Re: I Bonds as part of a portfolio

Post by placeholder » Thu Nov 14, 2013 4:56 pm

wintermute wrote:Does anyone know if TD auto-redeems electronic I-bonds? If they don't, you can hold onto them and delay redemption in retirement.
Even if you could it wouldn't be legal. According to someone in this thread http://www.bogleheads.org/forum/viewtop ... 2&t=112365 EE bonds are automatically redeemed at final maturity. Probably the same for I bonds.

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