What age to buy I bonds?

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xrw1
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What age to buy I bonds?

Post by xrw1 » Mon Mar 03, 2014 10:01 am

Hi everyone,

I am currently 27 and have maxed out my roth and on track to max out my 401k. I also have started to invest in a taxable. I have a 80/20 aa

I know there have been talks about people buying I bonds with their tax refunds. But I was wondering would it make sense for a 27 year old to buy I bonds? 30 years from now I will be 57 where i would probably be at my highest tax bracket.

At what age should people consider buying I bonds?


Thank you

letsgobobby
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Re: What age to buy I bonds?

Post by letsgobobby » Mon Mar 03, 2014 10:13 am

Good question. I waited til my mid 30s to start buying for the reason you indicate. Have you looked into muni bonds?

Grt2bOutdoors
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Re: What age to buy I bonds?

Post by Grt2bOutdoors » Mon Mar 03, 2014 10:15 am

Don't let the tax dog wag the tail. The point is one should consider using I bonds for their intended purpose - as a safe store of value if you wish for some amount of your assets to match the rate of inflation, or in this year's case, exceed it by 20bps pre-tax. Age not withstanding, you don't know if you will hold for the full 30 years, you may decide to cash out in 5, 7, 10, 15, 20 or 25 years from now because you had an emergency or you needed it for some other purpose. If you have extra money and you want a liquid (after 1 year), taxable, and inflation protected asset - then look no further than I bonds.
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poker27
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Re: What age to buy I bonds?

Post by poker27 » Mon Mar 03, 2014 10:18 am

We are about the same age, and I purchased I bonds for the first time last year. My thinking right now is that I will use it for half of my emergency fund only, depending on my situation I may continue to buy them annually. I'm sure there will be a point in the next 30 years before retirement that I will have a 'soft' income year, and I can redeem then. I think if you have maxed out retirement accounts, have put something into taxable, I bonds are worth a serious look.

Buffetologist
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Re: What age to buy I bonds?

Post by Buffetologist » Mon Mar 03, 2014 10:23 am

I view I-bonds as a wholly different asset class - inflation hedge. Many people use gold, but you can lose money on gold, and lots of it. You can't lose money on I-bonds.

If you're 80-20, I might go to 80-15-5, where 5% is the I-bonds. If that doesn't cause you to max out, then don't max out.

Another line of reasoning is that as your wealth grows, it's going to be harder to build up a significant amount of I-bonds at $15K/year. If you're optimistic about your earning prospects, you might want to max out anyway using more or all of your bond allocation, because a) the dominant determination of return on a bond investment is the initial coupon and right now it is very low, and thus a pretty lackluster investment, and b) you will eventually be limited in your I-bond allocation.

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Re: What age to buy I bonds?

Post by Jack FFR1846 » Mon Mar 03, 2014 10:23 am

Buy them now, if you can.

I started buying small quantities in my early 30's just to have some interest bearing savings that didn't get taxed every year. I slowly built up my numbers to the point where it became not only my emergency fund, but my savings account. When I buy a new car, I cash out savings bonds to pay for it. Yes, I have to pay federal tax but I'm in an income tax state so I avoid the state tax. I've done this long enough now that I've built up to several hundred thousand dollars in them. We bought 2 new cars in 2013 and cashed bonds to do so.

A down side is that colleges will see any bonds as assets in the FAFSA process. Had I understood this years ago, I would have maximized all of the pre tax retirement options with excess bond money.
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sscritic
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Re: What age to buy I bonds?

Post by sscritic » Mon Mar 03, 2014 10:42 am

Well my granddaughters didn't buy them, but I gave some to them as birthday presents (for their real birthdays, not the anniversaries of their birthdays). I guess you could call that age zero. Didn't any of your relatives give you savings bonds when you were born? That used to be relatively common 50 and 60 years ago.

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G-Money
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Re: What age to buy I bonds?

Post by G-Money » Mon Mar 03, 2014 11:01 am

Really depends on how you may use them.

If you plan on having kids and paying for college, you can redeem savings bonds titled in your name to pay for your kids' college tax-free. Will show up as a parental asset on FAFSA, but so will 529 accounts.

If they're for retirement, right, you want to either hold off on buying them until 30 years before you think you'll be retired (or at least in a lower tax bracket). Alternatively, you can pay taxes on the accrual method, paying taxes on whatever interest is earned each year. Of course, this loses the benefit of tax deferral, but it's an option.
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xrw1
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Re: What age to buy I bonds?

Post by xrw1 » Mon Mar 03, 2014 11:10 am

To be honest, I don't know what I would be using my Ibond allocation for if I were to start one.

Right now everything I invest in has been for retirement. I do keep about 1 years expenses in a high yield savings (emergency fund).

The 2 things on my list in the near term (1-2 years) is engagement ring and a car.

Any extra bonus and or raises I have gotten in the past 2 years, I just end up investing half of it into my taxable account and the other half is used for stuff I have been holding off to buy like a newer bicycle or rock climbing gear.

sls239
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Re: What age to buy I bonds?

Post by sls239 » Mon Mar 03, 2014 11:28 am

Mathematically - if we assume 3% return and compare paying 25% tax on earnings at the end versus 15% on earnings every year for 30 years - I got 20,174 for the deferral scenario and 20,756 for the every year scenario.

It isn't a perfect model, but it shows you that deferral over 30 years can come close to making up the difference in tax rates all by itself.

letsgobobby
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Re: What age to buy I bonds?

Post by letsgobobby » Mon Mar 03, 2014 11:53 am

1. High income taxpayers cannot use savings bonds tax free for education.
2. Paying a terminal tax rate of 50% is more likely than paying a terminal rate of 25% for an already high earner who will be in their peak earning years 30 years hence.
3. A high earner with an 80/20 portfolio is not very vulnerable to inflation and thus the unique advantages of I bonds are not particularly attractive.

I saw no reason to own these until my mid 30s, but have maxed them out since. Through my sixties I hope to redeem them in such a way to minimize the tax hit.

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Re: What age to buy I bonds?

Post by jackholloway » Mon Mar 03, 2014 12:59 pm

I am in my mid 40s, and started buying them last year. My EF should be roughly 100k, based on expected turbulence, et al, and i-bonds would be a better place to keep that than the savings account currently paying between zip and none. In four years, I will have about that much in i-bonds, and will have to decide how much of my portfolio needs to be inflation protected.

The question now is whether to buy at the present 0,2% real, or wait for new rates.

anoop
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Re: What age to buy I bonds?

Post by anoop » Tue Mar 04, 2014 1:59 am

Buffetologist wrote: Another line of reasoning is that as your wealth grows, it's going to be harder to build up a significant amount of I-bonds at $15K/year.
How do you get 15K/yr? The limit is 10K.

letsgobobby
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Re: What age to buy I bonds?

Post by letsgobobby » Tue Mar 04, 2014 1:50 pm

anoop wrote:
Buffetologist wrote: Another line of reasoning is that as your wealth grows, it's going to be harder to build up a significant amount of I-bonds at $15K/year.
How do you get 15K/yr? The limit is 10K.
$10k per individual SSN, and then an additional $5k per tax return = $15k per individual, or $25k for a married couple.

fareastwarriors
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Re: What age to buy I bonds?

Post by fareastwarriors » Tue Mar 04, 2014 6:29 pm

letsgobobby wrote:1. High income taxpayers cannot use savings bonds tax free for education.
2. Paying a terminal tax rate of 50% is more likely than paying a terminal rate of 25% for an already high earner who will be in their peak earning years 30 years hence.
3. A high earner with an 80/20 portfolio is not very vulnerable to inflation and thus the unique advantages of I bonds are not particularly attractive.

I saw no reason to own these until my mid 30s, but have maxed them out since. Through my sixties I hope to redeem them in such a way to minimize the tax hit.

Very good points.

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Mel Lindauer
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Re: What age to buy I bonds?

Post by Mel Lindauer » Tue Mar 04, 2014 6:46 pm

Remember, when/if one is approaching the earning level where Savings Bonds can no longer be used for qualifying educational expenses, you can always redeem the Savings Bonds and put the entire proceeds into a 529 Plan before you exceed the earning limitations. Contributions to a 529 Plan qualify for the tax-free treatment and can then be used later for educational expenses.
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Ella
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Re: What age to buy I bonds?

Post by Ella » Tue Mar 04, 2014 7:50 pm

xrw1 wrote:I know there have been talks about people buying I bonds with their tax refunds. But I was wondering would it make sense for a 27 year old to buy I bonds? 30 years from now I will be 57 where i would probably be at my highest tax bracket
Dumb Question Alert: do you HAVE to cash out your bonds in year 30 and pay the taxes? I know you won't get any more interest after year 30, but could you leave the Ibond alone and cash it out only in a year that makes sense tax-wise?

I get that leaving it earning no interest is not ideal, I just want to make sure that the OP (and me!) understands the what the rules are.

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Re: What age to buy I bonds?

Post by Mako » Tue Mar 04, 2014 8:16 pm

Ella wrote:
Dumb Question Alert: do you HAVE to cash out your bonds in year 30 and pay the taxes? I know you won't get any more interest after year 30, but could you leave the Ibond alone and cash it out only in a year that makes sense tax-wise?

I get that leaving it earning no interest is not ideal, I just want to make sure that the OP (and me!) understands the what the rules are.
You don't have to cash them in, ever, but the interest is reportable in the year of final maturity whether you cash them or not.

dad2000
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Re: What age to buy I bonds?

Post by dad2000 » Tue Mar 04, 2014 8:22 pm

I like them because they are very adaptable:

- They can be tax-exempt (subject to AGI limits) when used for qualified college expenses.
- They are the best inflation hedge (along with TIPS, but I prefer I-bonds in taxable space)
- They can be used as an emergency fund
- They can be used as flooring in retirement
- You can decide when they mature (up to 30 years)
- Their ER is 0%.

I buy $40k/year. Myself, my wife, 2 trusts.

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Watty
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Re: What age to buy I bonds?

Post by Watty » Tue Mar 04, 2014 8:59 pm

They can fill a niche for things like emergency funds, college savings, or for people that are retired or very near retirement but at the current interest rates you are almost guaranteed to lose purchasing power when you cash them after paying taxes on the gain so I am very skeptical about them as a long term investment

Even with any ongoing taxes the odds of something like a total stock market index fund having a negative real return over 30+ years is minuscule, especially if you will be making periodic investments and reinvesting dividends in it so that you get the advantage of dollar cost averaging.

If you want some long term inflation coverage then buying individual TIPS in a retirement account would be an alternative to look at.

wastenot
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Re: What age to buy I bonds?

Post by wastenot » Wed Mar 05, 2014 9:26 am

dad2000 wrote:I like them because they are very adaptable:


- They are the best inflation hedge (along with TIPS, but I prefer I-bonds in taxable space)
In my opinion, I-bonds are even better than TIPS because they can never decline in value. In 2013, for example, TIPS funds dropped about 7% (IIRC).

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Mel Lindauer
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Re: What age to buy I bonds?

Post by Mel Lindauer » Wed Mar 05, 2014 9:59 am

wastenot wrote:
dad2000 wrote:I like them because they are very adaptable:


- They are the best inflation hedge (along with TIPS, but I prefer I-bonds in taxable space)
In my opinion, I-bonds are even better than TIPS because they can never decline in value. In 2013, for example, TIPS funds dropped about 7% (IIRC).
That's correct. The composite rate on I Bonds can never go below zero and you never have to give back any of the previously-earned interest, even during periods of deflation. In fact, the higher the rate of deflation, the higher the real return will be on I Bonds.

For example, if inflation is -5% (deflation), then the I Bond will actually be returning 5% real because the composite rate is 0%, which is 5% above the deflationary rate. On the other hand, TIPS can give back some of the previously-earned inflation rate in deflationary periods.
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Re: What age to buy I bonds?

Post by Jeff7 » Wed Mar 05, 2014 10:12 am

My I-bonds are acting as my savings account/emergency fund. Since checking accounts either pay 0% interest, or else require an very high number of transactions per month in order to pay any appreciable amount of interest, there aren't many options available for safe storage of liquid assets. (That's a "very high" number of transactions for me, anyway. The norm that I see is 15 a month, and that would be difficult. 2 gas fillups, maybe 3 restaurant bills, and a bit of shopping. Grocery bills go on a credit card - I'm using that exclusively to build a credit history. Avoiding debt seems to make you a credit risk in our current system.)
Or there are savings accounts, where I could get 0.04% interest if I park more than $10,000 there.

Every month, I shuffle money into I-bonds automatically, so I'll eventually have plenty of liquid assets there, protected against inflation.

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Re: What age to buy I bonds?

Post by grog » Wed Mar 05, 2014 12:52 pm

I think the ibonds look great right now compared to the alternatives (bank accounts, CDs, munipal bonds). But I really wonder if the people buying ibonds right now with fixed rates at or near zero are going to keep them for 30 years. It's possible/likely current ibonds won't look so great at some point in the next 10, 20 years and it will be tempting to redeem them and put the money in other assets.

letsgobobby
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Re: What age to buy I bonds?

Post by letsgobobby » Wed Mar 05, 2014 1:12 pm

To both previous responses, I agree - the problem with I bonds right now is that after taxes their return is likely to be zero, because you have to pay taxes on the inflation component of their return in addition to the 0.2% fixed rate. The only way to avoid that is to end up in an income situation when you redeem that you are eligible for tax-free withdrawals - ie, redemption for higher education or by virtue of being in the 0% or otherwise very low tax bracket.

Still, what is the alternative for absolute assurance of protection from inflation in a taxable account? Not much.

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Re: What age to buy I bonds?

Post by Phineas J. Whoopee » Wed Mar 05, 2014 1:13 pm

With respect to paying the taxes on the interest later, which includes the inflation component, it's very simple (a.k.a. everybody should do what I do!).

Each year, using your top marginal rate, calculate how much the tax would have been on your I Bond interest had you paid it annually. Then save precisely that much more. Despite being individuals using cash-basis accounting, nothing stops us from keeping in mind the future liabilities our present actions have committed us to.

If you're not already maxing I Bonds you can even put the additional savings into them. That way they'll cover their own taxes.

PJW

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Re: What age to buy I bonds?

Post by Grt2bOutdoors » Wed Mar 05, 2014 1:23 pm

I don't purchase I bonds with the expectation that I will receive capital appreciation, I purchase them with the expectation that I will receive all of my capital back and at a slightly lower than depreciated rate if I were to hold my cash in a shoebox, under the mattress, in CD or savings account after-tax and I will be able to get my hands on those funds within 1-2 days. If I want return on my capital, I will invest in more appropriate vehicles like Total Stock Market Index, Total International Index, add some Emerging Mkts spice, some Small Cap or Small Value Index spice. The blended rate is my portfolio return - i'm interested in the blended rate, not the singular return of each particular component. That is what everyone should be concerned with - so what, cash which makes up 5% of my portfolio returns 0%, however my overall portfolio returned 22% including the cash return or I bond return. I can't see how earning a 22% return is something to sneeze at, or even a high single digit rate of return for that matter.
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Re: What age to buy I bonds?

Post by Mel Lindauer » Wed Mar 05, 2014 1:58 pm

The bottom line is that at the present time, while I Bonds aren't all that great, they are probably close to the best of a bad lot of risk-free investments to choose from. I consider them cash-like as opposed to the good old I Bonds with 3+% real yields which I consider to be long-term bonds
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Re: What age to buy I bonds?

Post by abuss368 » Wed Mar 05, 2014 5:13 pm

Mel Lindauer wrote:Remember, when/if one is approaching the earning level where Savings Bonds can no longer be used for qualifying educational expenses, you can always redeem the Savings Bonds and put the entire proceeds into a 529 Plan before you exceed the earning limitations. Contributions to a 529 Plan qualify for the tax-free treatment and can then be used later for educational expenses.
Contributions to a qualified 529 plan may also be deductible at the state level.
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Re: What age to buy I bonds?

Post by weltschmerz » Wed Mar 05, 2014 9:29 pm

Anytime is a great time to start buying savings bonds if you would like to expand your tax-advantaged space and hold your bonds as a "barbell". For instance, instead of holding an intermediate-term bond fund such as Total Bond Market Fund, you can hold long-term bonds such as VBLTX or VUSTX in your retirement accounts, plus savings bonds (I & EE) in your taxable accounts. In this way, your total bond allocation has an intermediate-term duration and is completely tax advantaged.

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