buy I-bonds now or wait after May 1?

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texasdoc
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buy I-bonds now or wait after May 1?

Post by texasdoc » Tue Jan 07, 2014 7:57 pm

first time post
just learned about I series savings bond from this forum ( thanks!) and would like to add them to my portfolio. Should I wait till after May 1 in case the fixed interest rate component rises ? I intend to buy the max 20,000 ( me and hers ) .

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Re: buy I-bonds now or wait after May 1?

Post by tipswatcher » Tue Jan 07, 2014 8:58 pm

texasdoc, I typically buy I Bonds up to the maximum in January, not worrying about what the fixed-rate might do during the year. This year, though, I figured I would sit it out for awhile and watch what interest rates are doing.

The I Bond fixed rate is now set at 0.2%, which I consider a 'gift' from the US Treasury. There really was no justification for setting the rate above zero. Typically, I Bonds pay about 1% less than a 10-year TIPS. And rightly so, because I bonds earn tax-deferred interest until you cash out, and they offer a flexible maturity schedule, 1 year (with a small penalty) to 5 years (no penalty) to 30 years. Your choice.

With the 10-year TIPS now yielding 0.7%, the conditions still aren't there for a bump in the I Bond fixed rate, but things could change in 2014. You have until April 30 to decide. If you see the 10-year TIPS rate dropping, it is highly unlikely that the I Bond fixed rate would increase. If you see it rising, let's say to 1.2% or higher, then hey, wait it out. Here is a site where you can check the current yield:

http://www.bloomberg.com/markets/rates- ... -bonds/us/

I'm a huge fan of I Bonds and I say buy them to the maximum every year and never sell them unless you need the cash.

http://tipswatch.com/2013/11/04/more-ev ... ainer-buy/
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Re: buy I-bonds now or wait after May 1?

Post by sscritic » Tue Jan 07, 2014 9:10 pm

Why not wait until November?

You have three shots at the apple as rates change May 1 and November 1. Those two dates divide the year into three pieces, beginning, middle, and end.

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Re: buy I-bonds now or wait after May 1?

Post by texasdoc » Tue Jan 07, 2014 9:34 pm

@tipswatcher _ thanks for the link. I agree that they are very flexible. The tax benefit to me is a big deal ( 41 yo now in 39% bracket, so in 30 yrs i'll be retired in a much lower bracket)
@sscritic - the money is earning nothing now in my bank account . At least it will earn inflation till november. And if rate spikes in november, i can buy at new rate in january 2015

Right now i lean towards waiting till may

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Re: buy I-bonds now or wait after May 1?

Post by TheTimeLord » Tue Jan 07, 2014 9:51 pm

texasdoc wrote:first time post
just learned about I series savings bond from this forum ( thanks!) and would like to add them to my portfolio. Should I wait till after May 1 in case the fixed interest rate component rises ? I intend to buy the max 20,000 ( me and hers ) .


I buy half my bonds in May and half in December.
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Re: buy I-bonds now or wait after May 1?

Post by John3754 » Tue Jan 07, 2014 10:23 pm

What if the rate goes down (back to 0%) instead of up, then what?

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Re: buy I-bonds now or wait after May 1?

Post by Mel Lindauer » Tue Jan 07, 2014 10:53 pm

My previous post didn't show up, so I'll start over.

What if the May rates drop back to 0% where they were for some time? As Tipswatcher correctly pointed out, there was no real reason for the recent increase from 0% to 0.2%, so the rate could just as well drop in May. You can hedge your bet by buying 10k now and the other 10k in May.
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Re: buy I-bonds now or wait after May 1?

Post by tipswatcher » Tue Jan 07, 2014 11:44 pm

What if the May rates drop back to 0% where they were for some time?


Mel, that is the KEY question, and it is why I would heavily favor buying before April 30. We have some time to see where rates are headed with the Fed tapering evolving into ... ?

If the economy starts booming, the TIPS yield will climb, but the Treasury might not want to add to its 'gift.' But if the economy stumbles and rates start dipping, that 0.2% will be at risk.

I personally think that I Bonds even at 0.0% are worth buying and holding forever, until you need the cash. Anything above 0.0% is gravy. But history tells us that I Bonds can pay 3,0%+ plus above inflation, and I still own some of those wonders from the glory days of 2001.
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Re: buy I-bonds now or wait after May 1?

Post by Mel Lindauer » Wed Jan 08, 2014 1:49 am

Yes, even at today's low rates, tax-deferred I Bonds remain a decent investment. Fortunately, many of us backed up the truck when they had fixed rates of 3.0' 3.3, 3.4 and 3.6% real.

tipswatcher wrote:
What if the May rates drop back to 0% where they were for some time?


Mel, that is the KEY question, and it is why I would heavily favor buying before April 30. We have some time to see where rates are headed with the Fed tapering evolving into ... ?

If the economy starts booming, the TIPS yield will climb, but the Treasury might not want to add to its 'gift.' But if the economy stumbles and rates start dipping, that 0.2% will be at risk.

I personally think that I Bonds even at 0.0% are worth buying and holding forever, until you need the cash. Anything above 0.0% is gravy. But history tells us that I Bonds can pay 3,0%+ plus above inflation, and I still own some of those wonders from the glory days of 2001.
Best Regards - Mel | | Semper Fi

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Re: buy I-bonds now or wait after May 1?

Post by MKP » Wed Jan 08, 2014 7:16 am

Mel Lindauer wrote:Yes, even at today's low rates, tax-deferred I Bonds remain a decent investment. Fortunately, many of us backed up the truck when they had fixed rates of 3.0' 3.3, 3.4 and 3.6% real.

tipswatcher wrote:
What if the May rates drop back to 0% where they were for some time?


Mel, that is the KEY question, and it is why I would heavily favor buying before April 30. We have some time to see where rates are headed with the Fed tapering evolving into ... ?

If the economy starts booming, the TIPS yield will climb, but the Treasury might not want to add to its 'gift.' But if the economy stumbles and rates start dipping, that 0.2% will be at risk.

I personally think that I Bonds even at 0.0% are worth buying and holding forever, until you need the cash. Anything above 0.0% is gravy. But history tells us that I Bonds can pay 3,0%+ plus above inflation, and I still own some of those wonders from the glory days of 2001.


sadly i was not working and didnt have any money to save when those rates existed. :oops:

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Re: buy I-bonds now or wait after May 1?

Post by Mel Lindauer » Wed Jan 08, 2014 1:58 pm

MKP wrote:
Mel Lindauer wrote:Yes, even at today's low rates, tax-deferred I Bonds remain a decent investment. Fortunately, many of us backed up the truck when they had fixed rates of 3.0' 3.3, 3.4 and 3.6% real.

tipswatcher wrote:
What if the May rates drop back to 0% where they were for some time?


Mel, that is the KEY question, and it is why I would heavily favor buying before April 30. We have some time to see where rates are headed with the Fed tapering evolving into ... ?

If the economy starts booming, the TIPS yield will climb, but the Treasury might not want to add to its 'gift.' But if the economy stumbles and rates start dipping, that 0.2% will be at risk.

I personally think that I Bonds even at 0.0% are worth buying and holding forever, until you need the cash. Anything above 0.0% is gravy. But history tells us that I Bonds can pay 3,0%+ plus above inflation, and I still own some of those wonders from the glory days of 2001.


sadly i was not working and didnt have any money to save when those rates existed. :oops:


Well, at least you have a good excuse. Some folks who had the money didn't heed my advice back then because the market was booming and 3.6% real didn't appeal to them.
Best Regards - Mel | | Semper Fi

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Re: buy I-bonds now or wait after May 1?

Post by DetroitRed » Wed Jan 08, 2014 4:21 pm

I'll make an additional estimated federal tax payment before 1/15/14 so that I can buy $5,000 of paper I bonds using IRS Form 8888.

Per Mel's Nov 2013 Forbes column, this will again be an option for the 2013 tax year -- http://www.forbes.com/sites/theboglehea ... r-i-bonds/

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Re: buy I-bonds now or wait after May 1?

Post by ajcp » Wed Jan 08, 2014 7:28 pm

Mel Lindauer wrote:
MKP wrote:
Mel Lindauer wrote:Yes, even at today's low rates, tax-deferred I Bonds remain a decent investment. Fortunately, many of us backed up the truck when they had fixed rates of 3.0' 3.3, 3.4 and 3.6% real.

tipswatcher wrote:
What if the May rates drop back to 0% where they were for some time?


Mel, that is the KEY question, and it is why I would heavily favor buying before April 30. We have some time to see where rates are headed with the Fed tapering evolving into ... ?

If the economy starts booming, the TIPS yield will climb, but the Treasury might not want to add to its 'gift.' But if the economy stumbles and rates start dipping, that 0.2% will be at risk.

I personally think that I Bonds even at 0.0% are worth buying and holding forever, until you need the cash. Anything above 0.0% is gravy. But history tells us that I Bonds can pay 3,0%+ plus above inflation, and I still own some of those wonders from the glory days of 2001.


sadly i was not working and didnt have any money to save when those rates existed. :oops:


Well, at least you have a good excuse. Some folks who had the money didn't heed my advice back then because the market was booming and 3.6% real didn't appeal to them.


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13 year old me: "Trust me. 2014 me will appreciate this."

Missed my chance :|

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Re: buy I-bonds now or wait after May 1?

Post by Longtimelurker » Wed Jan 08, 2014 7:36 pm

@ current 0.2% fixed you still have a negative real return upon withdrawal (after tax). It makes a ton of sense to me to wait to see if you can get at least to a break-even point. All of my 0% fixed iBonds will be used in the next few years for big purchases (house, new car, etc) I really dont want anymore of them, and have no intention of holding something with a guaranteed negative return over 30 years.
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Re: buy I-bonds now or wait after May 1?

Post by Dutch » Wed Jan 08, 2014 7:49 pm

Longtimelurker wrote:@ current 0.2% fixed you still have a negative real return upon withdrawal (after tax). It makes a ton of sense to me to wait to see if you can get at least to a break-even point. All of my 0% fixed iBonds will be used in the next few years for big purchases (house, new car, etc) I really dont want anymore of them, and have no intention of holding something with a guaranteed negative return over 30 years.


All true, but the question is: what are your alternatives in fixed income?

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Re: buy I-bonds now or wait after May 1?

Post by Longtimelurker » Wed Jan 08, 2014 7:55 pm

Dutch wrote:
Longtimelurker wrote:@ current 0.2% fixed you still have a negative real return upon withdrawal (after tax). It makes a ton of sense to me to wait to see if you can get at least to a break-even point. All of my 0% fixed iBonds will be used in the next few years for big purchases (house, new car, etc) I really dont want anymore of them, and have no intention of holding something with a guaranteed negative return over 30 years.


All true, but the question is: what are your alternatives in fixed income?


my 0.75% savings account. for the $20k i would invest, and assuming 1.19% ibonds rate, I will make $36 less in interest waiting for the new rate. If the rate jumps 20 basis points in May, I will make $1,235 more in interest over the 30 year duration of an iBond. If you call it a coin flip that the rate will jump, the decision becomes obvious, does it not?
Stay the course. If you can't resist greed, and fear is proven to be 2x as strong, you are doomed as an investor.

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Re: buy I-bonds now or wait after May 1?

Post by Kevin M » Wed Jan 08, 2014 8:36 pm

Due to the 3% PenFed 5-year CD deal, I am holding off on buying I Bonds in January. I used the cash I had targeted for I Bonds to put into the CD instead (in early December).

I still may buy I Bonds later in the year, but here's a case by forum member tfb (aka TheFinanceBuff, aka Harry Sit) for the superiority of the PenFed CD at current rates: 2014 I Bonds vs PenFed CD.

I had already come to a similar conclusion and purchased a couple of the CDs before reading Harry's blog post. Like Harry, I have been buying I Bonds in January for the last few years until this year. However, I still like the idea of building up inflation-protected space, and I don't own TIPS at current yields, so I haven't decided I won't buy I Bonds later this year.

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Re: buy I-bonds now or wait after May 1?

Post by texasdoc » Wed Jan 08, 2014 8:51 pm

DetroitRed wrote:I'll make an additional estimated federal tax payment before 1/15/14 so that I can buy $5,000 of paper I bonds using IRS Form 8888.

Per Mel's Nov 2013 Forbes column, this will again be an option for the 2013 tax year -- http://www.forbes.com/sites/theboglehea ... r-i-bonds/


That sounds like a good idea. Do you know if the paper I-bonds from a refund would be at the old ( before May 1 ) rate, or the new rate ?
I

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Re: buy I-bonds now or wait after May 1?

Post by tipswatcher » Wed Jan 08, 2014 9:19 pm

Due to the 3% PenFed 5-year CD deal, I am holding off on buying I Bonds in January.


I made the same decision. I usually buy I Bonds up to the limit in January, but I will wait now and my first investment of the year was the PenFed CD. I have a couple of TIPS maturing in January and April, so I will need to reinvest that money. But I will be buying I Bonds to the limit (I don't do the tax return ploy). Because you can only buy $10,000 a year per person, it is impossible to build a sizable stockpile of I Bonds unless you buy them every year. I am still in my accumulation years, so I will be buying.

I love I Bonds as a super safe chuck of my fixed-income allocation.
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Re: buy I-bonds now or wait after May 1?

Post by Kevin M » Wed Jan 08, 2014 9:42 pm

Creating a living trust, if you don't already have one, is a very easy way to double your annual I Bond limit. Even if you don't use it for anything else, you can easily create a living trust yourself using the Nolo Press book (your library may have a copy). You then create an entity account at TD in the name of your trust. TD does not require any trust documentation, so it's no harder than creating an individual TD account.

I've been buying $20K/year, $10K in each account. I also don't mess around with the tax refund thing, but might if the rate was higher.

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Re: buy I-bonds now or wait after May 1?

Post by Mel Lindauer » Wed Jan 08, 2014 11:04 pm

texasdoc wrote:
DetroitRed wrote:I'll make an additional estimated federal tax payment before 1/15/14 so that I can buy $5,000 of paper I bonds using IRS Form 8888.

Per Mel's Nov 2013 Forbes column, this will again be an option for the 2013 tax year -- http://www.forbes.com/sites/theboglehea ... r-i-bonds/


That sounds like a good idea. Do you know if the paper I-bonds from a refund would be at the old ( before May 1 ) rate, or the new rate ?
I


It all depends on when you file your tax return and which month they process the I Bonds once your tax refund is approved. You'll get the month they're issued, whenever that is. When you file your return doesn't necessarily guarantee you any particular issue date.
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Re: buy I-bonds now or wait after May 1?

Post by DetroitRed » Thu Jan 09, 2014 9:54 am

Longtimelurker wrote:
Dutch wrote:
Longtimelurker wrote:@ current 0.2% fixed you still have a negative real return upon withdrawal (after tax). It makes a ton of sense to me to wait to see if you can get at least to a break-even point. All of my 0% fixed iBonds will be used in the next few years for big purchases (house, new car, etc) I really dont want anymore of them, and have no intention of holding something with a guaranteed negative return over 30 years.


All true, but the question is: what are your alternatives in fixed income?


my 0.75% savings account. for the $20k i would invest, and assuming 1.19% ibonds rate, I will make $36 less in interest waiting for the new rate. If the rate jumps 20 basis points in May, I will make $1,235 more in interest over the 30 year duration of an iBond. If you call it a coin flip that the rate will jump, the decision becomes obvious, does it not?


You're leaving one thing out of your analysis - the taxes on I bonds are deferred until you cash them in, while the taxes on a savings account are due every year.

Not a huge difference at today's low rates (though 30 years of deferred taxes, even at a low rate would be a large amount of money), but if inflation ever were to increase, this would be an extremely valuable feature to have.

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Re: buy I-bonds now or wait after May 1?

Post by Longtimelurker » Thu Jan 09, 2014 10:33 am

DetroitRed wrote:You're leaving one thing out of your analysis - the taxes on I bonds are deferred until you cash them in, while the taxes on a savings account are due every year.

Not a huge difference at today's low rates (though 30 years of deferred taxes, even at a low rate would be a large amount of money), but if inflation ever were to increase, this would be an extremely valuable feature to have.


I am actually not leaving anything out of my analysis. The question isn't iBonds vs Savings account for the long term. It is iBonds now or in May. If you want to quibble that there are taxes to be paid on the $150 in interest that would be gained between now and May, then fine - call it $45 in taxes paid this year. There likewise would be taxes paid on that interest when you cash in iBonds, presumably at a lower marginal rate - lets call that $35 in taxes. So perhaps i am off $10. Perhaps not.
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Re: buy I-bonds now or wait after May 1?

Post by mikep » Thu Jan 09, 2014 6:31 pm

tipswatcher wrote:
Due to the 3% PenFed 5-year CD deal, I am holding off on buying I Bonds in January.


I made the same decision. I usually buy I Bonds up to the limit in January, but I will wait now and my first investment of the year was the PenFed CD. I have a couple of TIPS maturing in January and April, so I will need to reinvest that money. But I will be buying I Bonds to the limit (I don't do the tax return ploy). Because you can only buy $10,000 a year per person, it is impossible to build a sizable stockpile of I Bonds unless you buy them every year. I am still in my accumulation years, so I will be buying.

I love I Bonds as a super safe chuck of my fixed-income allocation.


Trust I-bonds are not eligible for the education exclusion, one reason I haven't done this yet.

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Re: buy I-bonds now or wait after May 1?

Post by Kevin M » Thu Jan 09, 2014 7:37 pm

mikep wrote:Trust I-bonds are not eligible for the education exclusion, one reason I haven't done this yet.

Good point. Probably more valuable to high-income folks who aren't eligible for the education exclusion anyway. And still currently a better deal than TIPS, so if one wants to maximize their inflation-protected space, I would think I Bonds in a trust would come before TIPS; but that assumes sufficient assets in taxable accounts, which probably also is likely to include more higher-income people.

Note: In verifying Mike's point, I found a BH thread (featuring Mike, sscritic and Mel) in which he posted verification of this from the Treasury department.

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Re: buy I-bonds now or wait after May 1?

Post by walker46 » Fri Jan 10, 2014 8:22 am

Even trivial decisions have to be made I suppose. But whether you decide to take your significant other out to eat tonight or not likely will have a larger financial impact than whether you buy your 10k of I-bonds in January or May. Say the fixed rate goes up another .2% and you buy in May, that’s worth twenty dollars a year more. If the current .2% is a fluke and you buy in January and it goes down in May to zero again then you are out 20 dollars. And neither scenario considers the opportunity costs of waiting till May. If I saw twenty bucks on the sidewalk I’d pick it up but it’s not going to change my life much at all.

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Re: buy I-bonds now or wait after May 1?

Post by Longtimelurker » Fri Jan 10, 2014 9:03 am

walker46 wrote:Even trivial decisions have to be made I suppose. But whether you decide to take your significant other out to eat tonight or not likely will have a larger financial impact than whether you buy your 10k of I-bonds in January or May. Say the fixed rate goes up another .2% and you buy in May, that’s worth twenty dollars a year more. If the current .2% is a fluke and you buy in January and it goes down in May to zero again then you are out 20 dollars. And neither scenario considers the opportunity costs of waiting till May. If I saw twenty bucks on the sidewalk I’d pick it up but it’s not going to change my life much at all.


My math says that 0.2% change in rate is worth $1,235 over 30 years. If for you, that is so trivial as to warrant less than the 5 minutes I spent make the decision… congratulations! BTW: That is a $14,825 PER HOUR activity.
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Re: buy I-bonds now or wait after May 1?

Post by mnvalue » Sat Jan 11, 2014 3:34 am

ajcp wrote:Parents: "What do you mean you need the bank account number? What's a treasury direct?"
13 year old me: "Trust me. 2014 me will appreciate this."

Haha! 14 year old me exchanged 50% of his EE bonds for them. Unfortunately, for whatever reason, the rest (and my sister's EE bonds) did not get exchanged. But 2014 me loves 14 year old me for what did get done.

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Re: buy I-bonds now or wait after May 1?

Post by Buffetologist » Sat Jan 11, 2014 7:41 am

Kevin M wrote:Creating a living trust, if you don't already have one, is a very easy way to double your annual I Bond limit. Even if you don't use it for anything else, you can easily create a living trust yourself using the Nolo Press book (your library may have a copy). You then create an entity account at TD in the name of your trust. TD does not require any trust documentation, so it's no harder than creating an individual TD account.

I've been buying $20K/year, $10K in each account. I also don't mess around with the tax refund thing, but might if the rate was higher.

Kevin


I don't understand how buying in a living trust can increase your purchase limit. You still use the same social security number.

Do you have a source or a link describing how to own savings bonds within one's living trust. I'd prefer to do that anyway, regardless of the limit. Can my existing I-bonds be transferred in?

Currently my wife and I buy $10K each and then get $5K back with our tax return.

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Re: buy I-bonds now or wait after May 1?

Post by HueyLD » Sat Jan 11, 2014 8:42 am

.............
Last edited by HueyLD on Sat Feb 07, 2015 4:31 pm, edited 1 time in total.

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Re: buy I-bonds now or wait after May 1?

Post by ks289 » Sat Jan 11, 2014 10:04 am

HueyLD wrote:
I don't understand how buying in a living trust can increase your purchase limit. You still use the same social security number.

Do you have a source or a link describing how to own savings bonds within one's living trust. I'd prefer to do that anyway, regardless of the limit. Can my existing I-bonds be transferred in?

http://treasurydirect.gov/indiv/help/TD ... rnMore.htm


After reading the link, I also need guidance on understanding how having a living trust (created to avoid probate and not a separate tax paying entity with no EIN) should be able to increase the purchase limit. I understand the process for holding assets in a living trust, but I did not realize there would arise situations where a living revocable trust would allow for more/"duplicate" rights or benefits to the individual.

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Re: buy I-bonds now or wait after May 1?

Post by Cosmo » Sat Jan 11, 2014 11:04 am

Longtimelurker wrote:@ current 0.2% fixed you still have a negative real return upon withdrawal (after tax). It makes a ton of sense to me to wait to see if you can get at least to a break-even point. All of my 0% fixed iBonds will be used in the next few years for big purchases (house, new car, etc) I really dont want anymore of them, and have no intention of holding something with a guaranteed negative return over 30 years.


If you can hold until retirement, it may make sense to wait until then when you are in a lower tax bracket.

If you have kids, you may qualify to redeem them tax-free, if they are applied to your children's education.

I don't quite understand the logic here. Would you rather own CDs earning less than 1% before taxes?

Cosmo

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Re: buy I-bonds now or wait after May 1?

Post by Kevin M » Sat Jan 11, 2014 3:20 pm

ks289 wrote:
HueyLD wrote:
I don't understand how buying in a living trust can increase your purchase limit. You still use the same social security number.

Do you have a source or a link describing how to own savings bonds within one's living trust. I'd prefer to do that anyway, regardless of the limit. Can my existing I-bonds be transferred in?

http://treasurydirect.gov/indiv/help/TD ... rnMore.htm


After reading the link, I also need guidance on understanding how having a living trust (created to avoid probate and not a separate tax paying entity with no EIN) should be able to increase the purchase limit. I understand the process for holding assets in a living trust, but I did not realize there would arise situations where a living revocable trust would allow for more/"duplicate" rights or benefits to the individual.

I don't think you'll see it clarified on the TD site, but it has been discussed extensively in threads here, and a careful reading of the regulations indicates that the annual purchase limit applies separately to trusts (forum member sscritic helped decipher the regulations for us in one or more of those threads). At one point there was a clear statement about it on the Federal Reserve bank web site (not TD), but last time I looked I couldn't find it. I copied this from the web site when I originally found it:

Q: What is the annual purchase limit for U.S. Savings Bonds?

A: Effective January 1, 2008, the annual (calendar year) purchase limit applying to Series EE and Series I savings bonds is $5,000, issue price, for each series. The limit is applied per Social Security Number (SSN) or Taxpayer Identification Number (TIN). Individuals or entities may purchase up to $5,000 worth of each series in paper form. In addition, individuals can buy up to the same amount of each series in TreasuryDirect online accounts, or a total of $20,000 (issue price) in single ownership form per calendar year. Please note: Bonds purchased as gifts in the names of other people do not count against the bond purchaser’s own annual purchase limit, even if the purchaser’s SSN is used for the gift purchase.

Q: How does the limit apply to bonds purchased in the name of my trust?

A: You may purchase up to $5,000, issue price, for each series in the name of your trust using the TIN assigned to the trust. The limit applies to the trust as a single entity. If an individual’s SSN is used to purchase bonds in the name of the trust, that individual may still purchase up to the annual limit of both series under his or her own name.


I have been buying the annual purchase limit for my individual account and for my entity account for the last three years. I don't have a separate EIN for my living trust, and provided my SS# to TD when establishing my entity account for my trust. My partner recently established an individual account and an entity account for her living trust, and purchased the annual limit in each account.

Kevin
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Re: buy I-bonds now or wait after May 1?

Post by Kevin M » Sat Jan 11, 2014 3:26 pm

Cosmo wrote:I don't quite understand the logic here. Would you rather own CDs earning less than 1% before taxes?

I probably wouldn't, but I might prefer to own a 5-year CD earning 3%. I also prefer to keep some assets in liquid form earning a little less than 1% since I may be spending the money in less than a year.

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Re: buy I-bonds now or wait after May 1?

Post by texasdoc » Sun Jan 12, 2014 11:45 pm

Dutch wrote:
Longtimelurker wrote:@ current 0.2% fixed you still have a negative real return upon withdrawal (after tax)..


please explain what you mean by *negative* real return. I thought I-bond interest rate cannot be less than zero.

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Re: buy I-bonds now or wait after May 1?

Post by ajcp » Mon Jan 13, 2014 6:38 am

texasdoc wrote:
Dutch wrote:
Longtimelurker wrote:@ current 0.2% fixed you still have a negative real return upon withdrawal (after tax)..


please explain what you mean by *negative* real return. I thought I-bond interest rate cannot be less than zero.


That's nominal return. Real return includes inflation. IOW, They will go up at the same rate as inflation + .2%, but if the taxes are more than the .2% then you'd get less than inflation.

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Re: buy I-bonds now or wait after May 1?

Post by #Cruncher » Mon Jan 13, 2014 7:58 am

texasdoc wrote:
Longtimelurker [in this post] wrote:@ current 0.2% fixed you still have a negative real return upon withdrawal (after tax)..
please explain what you mean by *negative* real return. I thought I-bond interest rate cannot be less than zero.
Before taxes you are correct, texasdoc. But after taxes Longtimelurker is correct that the real return can be less than zero. This is because taxes are based on the nominal return including the effect of inflation. For example, assume you buy a $1,000 I Bond with a fixed rate of 0.2% and redeem it after 5 years. Also assume the Consumer Price Index rises at a constant annual rate of 2% during the 5 years. Finally assume that after 5 years you are in a 25% tax bracket. Given these assumptions, as shown below, you would lose 0.3% annually in real terms after tax:

Code: Select all

  1,115   Nominal value after 5 years = 1000 X 1.022 X 1.022 X 1.022 X 1.022 X 1.022 *
     29   Tax                         = 115 X 25%
  1,086   Nominal value after tax     = 1115 - 29
  110.4%  Consumer Price Index        = 1.02 X 1.02 X 1.02 X 1.02 X 1.02
    984   Real value after tax        = 1086 / 110.4%
   (0.3%) Real annual return :    984 = 1000 X 0.997 X 0.997 X 0.997 X 0.997 X 0.997
* To simplify the calculation I've assumed I Bond interest is compounded annually while in fact it is compounded semi-annually. This affects the ending value less than $1.

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Re: buy I-bonds now or wait after May 1?

Post by amfox1 » Fri Jan 17, 2014 8:54 am

Keep in mind that, based on the last three months CPI-U, the next I-bond interest would be negative and offset the fixed 0.2% (but not below zero).

Sept 2013 CPI-U - 234.149 (baseline for next six month measurement period)
Oct. 2013 CPI-U - 233.546
Nov. 2013 CPI-U - 233.069
Dec. 2013 CPI-U - 233.049 (-0.47%)

I would be leaning toward buying my 2014 allocation in January, getting my six months at 1.38% and then (possibly) getting six months of zero interest. While I understand the benefit of PenFed CDs, I want to build up my store of I-bonds.

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Re: buy I-bonds now or wait after May 1?

Post by Blues » Sat Jan 18, 2014 10:57 am

amfox1 wrote:I would be leaning toward buying my 2014 allocation in January, getting my six months at 1.38% and then (possibly) getting six months of zero interest. While I understand the benefit of PenFed CDs, I want to build up my store of I-bonds.


Agree. To my way of thinking, the pluses and minuses relating to the potential interest on a $20,000 annual investment don't warrant a high degree of consternation.

Getting the annual I-Bond purchases and Roth conversions done in early January go toward keeping things simple both for my own administration of our accounts as well as facilitating my better half's understanding of our overall portfolio should she find herself in the unwelcome position of having to take on that chore.

Since we don't rely upon interest payments to fund any of our monthly expenses, the I-Bonds seem a good way of salting away money now for potential future expenses without worrying that the funds won't maintain their present value down the road should unexpected inflation arise.
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Re: buy I-bonds now or wait after May 1?

Post by amfox1 » Sat Feb 22, 2014 5:11 pm

amfox1 wrote:Keep in mind that, based on the last three months CPI-U, the next I-bond interest would be negative and offset the fixed 0.2% (but not below zero).

Sept 2013 CPI-U - 234.149 (baseline for next six month measurement period)
Oct. 2013 CPI-U - 233.546
Nov. 2013 CPI-U - 233.069
Dec. 2013 CPI-U - 233.049 (-0.47%)

I would be leaning toward buying my 2014 allocation in January, getting my six months at 1.38% and then (possibly) getting six months of zero interest. While I understand the benefit of PenFed CDs, I want to build up my store of I-bonds.


Updated:

Jan. 2013 CPI-U - 233.916 (-0.10%)

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Re: buy I-bonds now or wait after May 1?

Post by amfox1 » Wed Mar 26, 2014 7:26 am

Updated:

Sept 2013 CPI-U - 234.149 (baseline for next six month measurement period)
Feb. 2013 CPI-U - 234.781 (0.27%)

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Re: buy I-bonds now or wait after May 1?

Post by gd » Wed Mar 26, 2014 11:17 am

amfox1 wrote:Updated:

Sept 2013 CPI-U - 234.149 (baseline for next six month measurement period)
Feb. 2013 CPI-U - 234.781 (0.27%)

Do you mean Feb. 2014 above?

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Re: buy I-bonds now or wait after May 1?

Post by SnapShots » Wed Mar 26, 2014 3:22 pm

Timely thread.
the best decision many times is the hardest to do

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Re: buy I-bonds now or wait after May 1?

Post by tipswatcher » Tue Apr 15, 2014 8:21 am

This is my calculation, tell me if I am wrong:

The inflation index at the end of March was 236.293, a 0.92% increase over the 234.149 recorded at the end of September 2013. This should mean that the new I Bond inflation-adjusted rate will go an annual rate of 1.84% for six months beginning May 1.

I am sort of shocked the rate will be rising, but non-seasonally adjusted inflation rose 0.4% in February and 0.6% in March, wiping out some negative numbers earlier in the rate period.
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Re: buy I-bonds now or wait after May 1?

Post by supernova » Tue Apr 15, 2014 10:06 am

There won't be much of a difference either way. I would buy now so that you can cash them in earlier, if needed.

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Re: buy I-bonds now or wait after May 1?

Post by beardsworth » Tue Apr 15, 2014 11:08 am

tipswatcher wrote:This is my calculation, tell me if I am wrong:

The inflation index at the end of March was 236.293, a 0.92% increase over the 234.149 recorded at the end of September 2013. This should mean that the new I Bond inflation-adjusted rate will go an annual rate of 1.84% for six months beginning May 1.

I am sort of shocked the rate will be rising, but non-seasonally adjusted inflation rose 0.4% in February and 0.6% in March, wiping out some negative numbers earlier in the rate period.


Could you identify where you're getting those inflation numbers? I usually look for CPI numbers at

http://www.bls.gov/news.release/cpi.nr0.htm

and I don't see the kinds of percentage changes you're citing.

If there's another place I should be looking, would appreciate your citation to it. Thanks.

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Re: buy I-bonds now or wait after May 1?

Post by tipswatcher » Tue Apr 15, 2014 11:23 am

BLS report issued today includes this:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 1.5
percent over the last 12 months to an index level of 236.293 (1982-84=100).
For the month, the index rose 0.6 percent prior to seasonal adjustment.


I have been keeping track of the rate since September 2013; that number is included in previous posts in this thread.

And #cruncher has this great site with updated information:

http://eyebonds.info/tips/cpi/cpibig_06.html
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Buy I-bonds in April, 2014 or wait after May 1?

Post by shawcroft » Tue Apr 15, 2014 10:18 pm

tipswatcher wrote::

The inflation index at the end of March was 236.293, a 0.92% increase over the 234.149 recorded at the end of September 2013. This should mean that the new I Bond inflation-adjusted rate will go an annual rate of 1.84% for six months beginning May 1.

I am sort of shocked the rate will be rising, but non-seasonally adjusted inflation rose 0.4% in February and 0.6% in March, wiping out some negative numbers earlier in the rate period.


I will confess to being a bit dense on I-Bonds. I haven't bought any this year because I didn't have the funds available until this month. I intend to buy $10,000 from Treasury Direct for myself and the same amount for my wife. Would it be better to buy in April or wait until May?
Shawcroft

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Re: Buy I-bonds in April, 2014 or wait after May 1?

Post by mickcris » Wed Apr 16, 2014 12:48 am

shawcroft wrote:
tipswatcher wrote::

The inflation index at the end of March was 236.293, a 0.92% increase over the 234.149 recorded at the end of September 2013. This should mean that the new I Bond inflation-adjusted rate will go an annual rate of 1.84% for six months beginning May 1.

I am sort of shocked the rate will be rising, but non-seasonally adjusted inflation rose 0.4% in February and 0.6% in March, wiping out some negative numbers earlier in the rate period.


I will confess to being a bit dense on I-Bonds. I haven't bought any this year because I didn't have the funds available until this month. I intend to buy $10,000 from Treasury Direct for myself and the same amount for my wife. Would it be better to buy in April or wait until May?
Shawcroft


Right now they have a 0.2% fixed rate. If they are going to drop that back to 0% in May, then it would be best to buy in April. Don't think there is anyway to know what the next fixed rate is going to be though.

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Re: buy I-bonds now or wait after May 1?

Post by #Cruncher » Wed Apr 16, 2014 11:24 pm

tipswatcher wrote:This is my calculation, tell me if I am wrong: The inflation index at the end of March was 236.293, a 0.92% increase over the 234.149 recorded at the end of September 2013. This should mean that the new I Bond inflation-adjusted rate will go [to] an annual rate of 1.84% for six months beginning May 1.
Your calculation is correct, tipswatcher. The semi-annual inflation rate to be applied to all I Bonds during the six months beginning May 1st, will indeed be 0.92%. However, I would quibble with a couple of things you say:
  1. The CPI refers to an entire month, not to the end of a month.
  2. The overall annual rate for their first six months on I Bonds issued from May through October will be 1.84% only if the fixed rate for that period is 0%. (I know you realize this; but you worded it poorly. *)
beardsworth [to tipswatcher] wrote:Could you identify where you're getting those inflation numbers?
Besides the page of mine which tipswatcher suggests above, you can get them directly from the bls.gov web site. There used to be a simple text table with every month going back to 1913 at ftp.bls.gov/pub/special.requests/cpi/cpiai.txt, but that link no longer seems to be working. That data is now buried as table 24 inside a huge PDF file. There is a link to the most recent one at www.bls.gov/cpi/#tables, listed first under CPI Detailed Report Tables.

You can also check the box for "U.S. All items, 1982-84=100 - CUUR0000SA0" at data.bls.gov/cgi-bin/surveymost?cu, listed first under Consumer Price Index-All Urban Consumers. After checking the box, click [Retrieve Data]. You'll be taken to a page with options to expand the years displayed, graph the data, and export the data.

* When the fixed rate is small, the overall rate will equal the fixed rate plus twice the semi-annual inflation rate. But if the fixed rate is large, one must use the detailed formula spelled out under Combining the two rates. For example, from May through October a lucky owner of a 3% fixed rate I Bond purchased in May 2001 will earn at an annual composite rate of 4.87%, not 4.84%.

Code: Select all

Composite rate = [ fixed rate + ( 2 x inflation rate ) + ( fixed rate x inflation rate )]
0.048676       = [ 0.03       + ( 2 X 0.0092 )         + ( 0.03       X 0.0092 )]

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