Age 30, Moving from 15% to 25% tax bracket: Should I sell all my I-Bonds and rebuy them?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
AndroAsc
Posts: 1238
Joined: Sat Nov 21, 2009 7:39 am

Age 30, Moving from 15% to 25% tax bracket: Should I sell all my I-Bonds and rebuy them?

Post by AndroAsc » Fri Jul 10, 2015 10:08 am

I'm moving from a 15% bracket (2015) to a 25% bracket (2016). I'm currently in my early 30s.

I have a bunch of I-Bonds, all of them with 0% yield. All of them have also been held long enough to redeem. I know there is a 3mth loss of interest for early redemption. I have been thinking of redeeming/selling all my i-Bonds this year.

Here's my logic:
1) All the i-Bonds were purchased when I was in my 20s, and will reach maturity in my 50s, hopefully at the peak of my career earnings. If I sell all and rebuy them starting from now, the earliest i-Bonds will mature in my 60s, which is when I plan to retire.
2) Relative to CDs/bonds, i-Bonds (even at 0% rates) have performed better. But last quarter, because of a deflation in CPI, the total rate is at 0%. This means that if I time it right and redeem them, I will lose 3mths interest of 0%! Even if the timing is not right, i-Bond rates have steadily decreased over the years, and my guess is that I would lose 3mths interest of ~1%, which is acceptable to me.
3) All my i-Bonds rates are 0%, so they are not valuable, i.e. no harm redeeming early.
4) My i-Bonds that make up my investment portfolio is not very large. I can probably repurchase my current asset allocation of i-Bonds in a few years.

Is there anything wrong to my logic, and would you make this move?

Also, is there any i-Bond calculator out there, where I can input the purchase date, and it will tell me what interest has earned, is currently earning, etc... Thanks!

NightFall
Posts: 269
Joined: Wed Mar 12, 2014 4:38 pm

Re: Age 30, Moving from 15% to 25% tax bracket: Should I sell all my I-Bonds and rebuy them?

Post by NightFall » Fri Jul 10, 2015 10:16 am

Your reasoning is not bad, but you will be giving up a limited amount of ibond space. Since the amount is restricted and small, you may not be able to get that space back depending on how much you purchase in ibonds each year. If you don't purchase much in ibonds and the amount we're talking about is low, then it probably doesn't matter much. You're giving up on the tax deferral aspect though, which may or may not be offset by your possibly increased tax bracket in the future.

User avatar
BL
Posts: 9225
Joined: Sun Mar 01, 2009 2:28 pm

Re: Age 30, Moving from 15% to 25% tax bracket: Should I sell all my I-Bonds and rebuy them?

Post by BL » Fri Jul 10, 2015 10:19 am

I would check on whether you have some with a higher fixed rate, as that has been little or nothing for a while.

Angst
Posts: 2099
Joined: Sat Jun 09, 2007 11:31 am

Re: Age 30, Moving from 15% to 25% tax bracket: Should I sell all my I-Bonds and rebuy them?

Post by Angst » Fri Jul 10, 2015 10:37 am

Makes sense to me. I'm paring back my I-Bonds too, at least those paying 0 fixed rate.
Before you sell any that are less than 5 years old, be sure you've booked 3 months of zero % returns. I rely on #cruncher's website for figuring out this kind of thing. Can't recommend it enough:

http://eyebonds.info/ibonds/home1000.html
http://eyebonds.info/

lack_ey
Posts: 6701
Joined: Wed Nov 19, 2014 11:55 pm

Re: Age 30, Moving from 15% to 25% tax bracket: Should I sell all my I-Bonds and rebuy them?

Post by lack_ey » Fri Jul 10, 2015 10:43 am

I don't know... I Bonds don't look so hot compared to TIPS right now. If you're going to hold to about maturity either way, you can get over 1% real on the 30-year now. That may be worth it even with the tax (or just stuff it in tax-advantaged space and buy stocks in taxable).

If there are liquidity needs, maybe some TIPS, some I Bonds. Both, that is.

User avatar
#Cruncher
Posts: 2865
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: Age 30, Moving from 15% to 25% tax bracket: Should I sell all my I-Bonds and rebuy them?

Post by #Cruncher » Fri Jul 10, 2015 11:34 am

Yes, if you time it right, the 3 month's interest "penalty" will be $0. The following table shows that when this occurs depends on the month you purchased the I Bond.

Code: Select all

           6mo Period   Sell w/o
Purchased    Begins     Penalty
----------   ------     -------
Jan or Jul     Jul      Oct-Jan
Feb or Aug     Aug      Nov-Feb
Mar or Sep     Sep      Dec-Mar
Apr or Oct     Oct      Jan-Apr
May or Nov     May      Aug-Nov
Jun or Dec     Jun      Sep-Dec
For example, if you purchased an I Bond in January or July and redeem in October 2015 - January 2016, the interest penalty will be $0. October 1st 2015 would be optimum so that funds can be reinvested as soon as possible. But note that if you purchased in April or October, the $0 penalty period won't start until January of 2016 when you say your tax bracket will be higher. If you were to redeem in December this year, you'd have a one month non-$0 penalty.

You can see this in the growth history of a $1,000 I Bond with 0.00% Fixed Rate Purchased October 2013: If you redeem it in December you'll receive its value as of September 1st of $1,027.60. If you wait one month until January, you'll receive the $1,028.80 October 1st value. Wait three more months to April 2016 to redeem, and you'd receive the January 1st value; but that is the same $!,028.80. So, ignoring taxes, the optimum time to redeem would be January 2nd. Considering taxes, it might be better to redeem December 1st.

miles monroe
Posts: 1279
Joined: Mon Jan 20, 2014 12:14 pm

Re: Age 30, Moving from 15% to 25% tax bracket: Should I sell all my I-Bonds and rebuy them?

Post by miles monroe » Fri Jul 10, 2015 11:48 am

here's the calculator you asked about.

https://www.treasurydirect.gov/indiv/to ... ndcalc.htm

as a practical matter how much are you going to save by doing this?

i understand the logic behind getting the bonds to mature when you are 60 rather than 50. good thinking! but maybe the answer isn't to sell 10k of bonds and then buy them back. maybe the answer is to keep your 10k and add 10k to your position. not suggesting that, just bringing it up. remember, if you want 50k in bonds you just can't go out one day and buy them; you have to do it over a period of time. i wish i had more than i do.

Topic Author
AndroAsc
Posts: 1238
Joined: Sat Nov 21, 2009 7:39 am

Re: Age 30, Moving from 15% to 25% tax bracket: Should I sell all my I-Bonds and rebuy them?

Post by AndroAsc » Fri Jul 10, 2015 2:52 pm

The real objective of this move would be to 'reset' the age of my i-Bonds, so that they don't expire in my 50s. It will not make money now, but it will have a big impact if I am redeeming at a >30% tax rate or <15% tax rate later in life. i-Bonds only make up 6.67% of my total portfolio, and I don't have that much assets, so rebuying them will be easy.

Post Reply