EE/Ibonds & Tax Advantaged Space

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johnnysidestreet
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EE/Ibonds & Tax Advantaged Space

Post by johnnysidestreet » Sun Oct 15, 2017 6:15 pm

My current job that I am working does not offer a 401k, which obviously has me limited with tax advantaged space. Would it make sense for me to slowly shift my bond holdings to EE & I bonds in order to allow me to buy more equities in my IRA?

Thanks

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Noobvestor
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Re: EE/Ibonds & Tax Advantaged Space

Post by Noobvestor » Sun Oct 15, 2017 6:24 pm

I love my EE and I Bonds. 10K per type per year (more if you use the tax refund strategy for I Bonds). Between them, you've got inflation and deflation protection, tax-deferred, state tax exempt, etc.... The yields are pretty good considering what comparable bonds offer (e.g. individual TIPS or 20-year Treasuries). I have a ladder of EE bonds to sell at the 20-year doubling mark and max out I Bonds each year too. And yes, one of the definite advantages is that it frees up your limited tax-advantaged space.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

aristotelian
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Re: EE/Ibonds & Tax Advantaged Space

Post by aristotelian » Sun Oct 15, 2017 6:29 pm

Absolutely. Muni bond funds are also a good choice, especially for higher tax brackets.

johnnysidestreet
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Re: EE/Ibonds & Tax Advantaged Space

Post by johnnysidestreet » Sun Oct 15, 2017 6:37 pm

Thanks for the quick replies. Would 100% in EE/I bonds be ok? Or would I be better off still holding say 25-50% of my bond allocation in bnd?

Johm221122
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Re: EE/Ibonds & Tax Advantaged Space

Post by Johm221122 » Sun Oct 15, 2017 6:53 pm

Yes it would be advisable to not have all savings bonds,so you can easily rebalance
Savings bonds have major drawbacks in rebalancing,taxes because of tax differed status and EE bonds and maturity

johnnysidestreet
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Re: EE/Ibonds & Tax Advantaged Space

Post by johnnysidestreet » Sun Oct 15, 2017 7:21 pm

Johm221122 wrote:
Sun Oct 15, 2017 6:53 pm
Yes it would be advisable to not have all savings bonds,so you can easily rebalance
Savings bonds have major drawbacks in rebalancing,taxes because of tax differed status and EE bonds and maturity
makes sense. is there a certain allocation you would recommend? 50% bnd 50% ibonds? 75/25?

Johm221122
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Re: EE/Ibonds & Tax Advantaged Space

Post by Johm221122 » Sun Oct 15, 2017 7:30 pm

johnnysidestreet wrote:
Sun Oct 15, 2017 7:21 pm
Johm221122 wrote:
Sun Oct 15, 2017 6:53 pm
Yes it would be advisable to not have all savings bonds,so you can easily rebalance
Savings bonds have major drawbacks in rebalancing,taxes because of tax differed status and EE bonds and maturity
makes sense. is there a certain allocation you would recommend? 50% bnd 50% ibonds? 75/25?
Not without more information but consider is bnd your best option(tax wise) and how much percentage wise you'll need to rebalance
I'm 15% of portfolio in savings bonds and 25% in stable value(401 best option)

johnnysidestreet
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Re: EE/Ibonds & Tax Advantaged Space

Post by johnnysidestreet » Sun Oct 15, 2017 7:35 pm

Johm221122 wrote:
Sun Oct 15, 2017 7:30 pm
johnnysidestreet wrote:
Sun Oct 15, 2017 7:21 pm
Johm221122 wrote:
Sun Oct 15, 2017 6:53 pm
Yes it would be advisable to not have all savings bonds,so you can easily rebalance
Savings bonds have major drawbacks in rebalancing,taxes because of tax differed status and EE bonds and maturity
makes sense. is there a certain allocation you would recommend? 50% bnd 50% ibonds? 75/25?
Not without more information but consider is bnd your best option(tax wise) and how much percentage wise you'll need to rebalance
I'm 15% of portfolio in savings bonds and 25% in stable value(401 best option)
What information in specific? I'm 33, live in NY, in the 28% tax bracket. Currently have low 6 figures invested in the market and am aiming for around 15% of that in bonds.

I only have bnd because I barely know what I am doing and just have a simple 3 fund portfolio (85/15 equities:bonds and 70/30 vti to vxus/veu. Any advice you have would be much appreciated if you think I am doing something that should be changed.

Johm221122
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Re: EE/Ibonds & Tax Advantaged Space

Post by Johm221122 » Sun Oct 15, 2017 7:40 pm

johnnysidestreet wrote:
Sun Oct 15, 2017 7:35 pm
Johm221122 wrote:
Sun Oct 15, 2017 7:30 pm
johnnysidestreet wrote:
Sun Oct 15, 2017 7:21 pm
Johm221122 wrote:
Sun Oct 15, 2017 6:53 pm
Yes it would be advisable to not have all savings bonds,so you can easily rebalance
Savings bonds have major drawbacks in rebalancing,taxes because of tax differed status and EE bonds and maturity
makes sense. is there a certain allocation you would recommend? 50% bnd 50% ibonds? 75/25?
Not without more information but consider is bnd your best option(tax wise) and how much percentage wise you'll need to rebalance
I'm 15% of portfolio in savings bonds and 25% in stable value(401 best option)
What information in specific? I'm 33, live in NY, in the 28% tax bracket. Currently have low 6 figures invested in the market and am aiming for around 15% of that in bonds.
I would consider Municipal bonds as mentioned by aristotelian

And put about half for rebalancing in bond fund

johnnysidestreet
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Re: EE/Ibonds & Tax Advantaged Space

Post by johnnysidestreet » Sun Oct 15, 2017 7:50 pm

Johm221122 wrote:
Sun Oct 15, 2017 7:40 pm
I would consider Municipal bonds as mentioned by aristotelian

And put about half for rebalancing in bond fund
hmm...i don't know a single thing about muni bonds, will have to do some reading.

are you recommending that i have 50% muni bond(nyc?) in my taxable account and then 50% bnd in my ira and nothing in ibonds?

Johm221122
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Re: EE/Ibonds & Tax Advantaged Space

Post by Johm221122 » Sun Oct 15, 2017 7:59 pm

johnnysidestreet wrote:
Sun Oct 15, 2017 7:50 pm
Johm221122 wrote:
Sun Oct 15, 2017 7:40 pm
I would consider Municipal bonds as mentioned by aristotelian

And put about half for rebalancing in bond fund
hmm...i don't know a single thing about muni bonds, will have to do some reading.

are you recommending that i have 50% muni bond(nyc?) in my taxable account and then 50% bnd in my ira and nothing in ibonds?
I would use i bonds(possibly EE if you can hold 20 years)and municipal bonds,use IRA for stocks or mostly stocks

cjg
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Re: EE/Ibonds & Tax Advantaged Space

Post by cjg » Sun Oct 15, 2017 8:09 pm

johnnysidestreet wrote:
Sun Oct 15, 2017 7:35 pm
What information in specific? I'm 33, live in NY, in the 28% tax bracket. Currently have low 6 figures invested in the market and am aiming for around 15% of that in bonds.
If you have the same marginal tax rate today until you cash them out, the tax advantage of I and EE Bonds is equivalent to interest on interest being tax free. Since interest rates are lower right now, interest on interest will be a much smaller portion of your overall return. So really these are only a great deal tax-wise if you expect to be in a lower tax bracket when you cash them out. Since these would be maturing in your 50s which are often peak earning years, the tax advantage might not be all that much.

Johm221122
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Re: EE/Ibonds & Tax Advantaged Space

Post by Johm221122 » Sun Oct 15, 2017 8:15 pm

cjg wrote:
Sun Oct 15, 2017 8:09 pm
johnnysidestreet wrote:
Sun Oct 15, 2017 7:35 pm
What information in specific? I'm 33, live in NY, in the 28% tax bracket. Currently have low 6 figures invested in the market and am aiming for around 15% of that in bonds.
If you have the same marginal tax rate today until you cash them out, the tax advantage of I and EE Bonds is equivalent to interest on interest being tax free. Since interest rates are lower right now, interest on interest will be a much smaller portion of your overall return. So really these are only a great deal tax-wise if you expect to be in a lower tax bracket when you cash them out. Since these would be maturing in your 50s which are often peak earning years, the tax advantage might not be all that much.
The I bonds would be 30 years,the EE would be 20 because of the interest rate after 20 years

johnnysidestreet
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Re: EE/Ibonds & Tax Advantaged Space

Post by johnnysidestreet » Sun Oct 15, 2017 8:18 pm

Johm221122 wrote:
Sun Oct 15, 2017 7:59 pm
johnnysidestreet wrote:
Sun Oct 15, 2017 7:50 pm
Johm221122 wrote:
Sun Oct 15, 2017 7:40 pm
I would consider Municipal bonds as mentioned by aristotelian

And put about half for rebalancing in bond fund
hmm...i don't know a single thing about muni bonds, will have to do some reading.

are you recommending that i have 50% muni bond(nyc?) in my taxable account and then 50% bnd in my ira and nothing in ibonds?
I would use i bonds(possibly EE if you can hold 20 years)and municipal bonds,use IRA for stocks or mostly stocks
i like this approach, it kills me holding all of my bonds in the small amount of tax advantaged space i do have.

being that I live in NY, do you recommend I buy NY municipal bonds? Or am I better off with something such as vwitx? thanks for all the help, it is very much appreciated.

Johm221122
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Re: EE/Ibonds & Tax Advantaged Space

Post by Johm221122 » Sun Oct 15, 2017 8:26 pm

Do you live in Ny city and do you want to invest in only Ny state municipal bonds?

cjg
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Re: EE/Ibonds & Tax Advantaged Space

Post by cjg » Sun Oct 15, 2017 8:28 pm

Johm221122 wrote:
Sun Oct 15, 2017 8:15 pm
cjg wrote:
Sun Oct 15, 2017 8:09 pm
johnnysidestreet wrote:
Sun Oct 15, 2017 7:35 pm
What information in specific? I'm 33, live in NY, in the 28% tax bracket. Currently have low 6 figures invested in the market and am aiming for around 15% of that in bonds.
If you have the same marginal tax rate today until you cash them out, the tax advantage of I and EE Bonds is equivalent to interest on interest being tax free. Since interest rates are lower right now, interest on interest will be a much smaller portion of your overall return. So really these are only a great deal tax-wise if you expect to be in a lower tax bracket when you cash them out. Since these would be maturing in your 50s which are often peak earning years, the tax advantage might not be all that much.
The I bonds would be 30 years,the EE would be 20 because of the interest rate after 20 years
I could see using the put option of I-bonds before then. The current yield curve suggests that the market expects the real yield for 10-year TIPS bought 20 years from now will be around 1.27%.

johnnysidestreet
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Re: EE/Ibonds & Tax Advantaged Space

Post by johnnysidestreet » Sun Oct 15, 2017 8:40 pm

Johm221122 wrote:
Sun Oct 15, 2017 8:26 pm
Do you live in Ny city and do you want to invest in only Ny state municipal bonds?
i work in NYC, but do not live there and do not pay NYC income tax. I am not partial to investing in NY and am willing to invest in whatever would be the most sound financial decision.

Also, just to be clear, this is my first year in the 28% tax bracket, prior to this I was always 25% (which from my brief reading seems to be the break even for muni bonds). And I am infinitely closer to the 25/28 border than 28/33.

johnnysidestreet
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Re: EE/Ibonds & Tax Advantaged Space

Post by johnnysidestreet » Sun Oct 15, 2017 9:29 pm

Ok, after doing some more reading, what would you think of this?

i slowly sell all of my bond holdings (bnd) in my ira and invest in the following:

50% national intermediate muni fund
25% ny long term muni fund
25% ibonds (not too interested in EE bonds as I am also considering this plus my brokerage account my e-fund)

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whodidntante
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Re: EE/Ibonds & Tax Advantaged Space

Post by whodidntante » Sun Oct 15, 2017 11:00 pm

I don't own munis myself because the math doesn't work. Which means that when I do the math, I'm better off holding either intermediate term broad bond indexes, stable value funds, CDs in pretax than I am to buy munis. A lot of state specific funds own long bonds which have greater interest rate risk, and I really don't want to be holding the bag if my state continues to degrade fiscally.

If you want to own ibonds or EE bonds just accumulate them over time and trade in tax-advantaged as needed to rebalance. You'll are able to buy 15k in ibonds and also 10k in EE bonds annually so that should allow you to accumulate a hefty position over the years.

Johm221122
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Re: EE/Ibonds & Tax Advantaged Space

Post by Johm221122 » Mon Oct 16, 2017 1:39 am

johnnysidestreet wrote:
Sun Oct 15, 2017 9:29 pm
Ok, after doing some more reading, what would you think of this?

i slowly sell all of my bond holdings (bnd) in my ira and invest in the following:

50% national intermediate muni fund
25% ny long term muni fund
25% ibonds (not too interested in EE bonds as I am also considering this plus my brokerage account my e-fund)
Seems fine to me

aristotelian
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Re: EE/Ibonds & Tax Advantaged Space

Post by aristotelian » Mon Oct 16, 2017 8:02 am

Johm221122 wrote:
Sun Oct 15, 2017 8:15 pm
cjg wrote:
Sun Oct 15, 2017 8:09 pm
johnnysidestreet wrote:
Sun Oct 15, 2017 7:35 pm
What information in specific? I'm 33, live in NY, in the 28% tax bracket. Currently have low 6 figures invested in the market and am aiming for around 15% of that in bonds.
If you have the same marginal tax rate today until you cash them out, the tax advantage of I and EE Bonds is equivalent to interest on interest being tax free. Since interest rates are lower right now, interest on interest will be a much smaller portion of your overall return. So really these are only a great deal tax-wise if you expect to be in a lower tax bracket when you cash them out. Since these would be maturing in your 50s which are often peak earning years, the tax advantage might not be all that much.
The I bonds would be 30 years,the EE would be 20 because of the interest rate after 20 years
And he could hold the EE's longer. You are not forced to cash them out at 20.

Johm221122
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Re: EE/Ibonds & Tax Advantaged Space

Post by Johm221122 » Mon Oct 16, 2017 8:10 am

Yes he could
"Because of interest rates"
He probably would not,but they may be appeal more to him as he ages and if he still has no 401

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Re: EE/Ibonds & Tax Advantaged Space

Post by Grt2bOutdoors » Mon Oct 16, 2017 12:04 pm

johnnysidestreet wrote:
Sun Oct 15, 2017 6:15 pm
My current job that I am working does not offer a 401k, which obviously has me limited with tax advantaged space. Would it make sense for me to slowly shift my bond holdings to EE & I bonds in order to allow me to buy more equities in my IRA?

Thanks
You could do that. You could also open a taxable account holding Total Stock Market Index and Total International Stock Index, coupled with an intermediate tax exempt fund or that combo you proposed in a later thread. While I like EE bonds, at your age, I'd be equity heavy in both tax deferred and taxable savings used for retirement. Just because you don't have a 401k does not mean you can not invest in equities outside of one. At your age you should save/invest as much as possible because the compounding levers are going to work wonders in about 20-30 years. You can use tax loss harvesting in the taxable account when losses become available to manage your tax liability. Read the wiki on this.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

johnnysidestreet
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Re: EE/Ibonds & Tax Advantaged Space

Post by johnnysidestreet » Mon Oct 16, 2017 6:02 pm

Grt2bOutdoors wrote:
Mon Oct 16, 2017 12:04 pm
johnnysidestreet wrote:
Sun Oct 15, 2017 6:15 pm
My current job that I am working does not offer a 401k, which obviously has me limited with tax advantaged space. Would it make sense for me to slowly shift my bond holdings to EE & I bonds in order to allow me to buy more equities in my IRA?

Thanks
You could do that. You could also open a taxable account holding Total Stock Market Index and Total International Stock Index, coupled with an intermediate tax exempt fund or that combo you proposed in a later thread. While I like EE bonds, at your age, I'd be equity heavy in both tax deferred and taxable savings used for retirement. Just because you don't have a 401k does not mean you can not invest in equities outside of one. At your age you should save/invest as much as possible because the compounding levers are going to work wonders in about 20-30 years. You can use tax loss harvesting in the taxable account when losses become available to manage your tax liability. Read the wiki on this.
I do hold Total Stock Market and Total International in a regular taxable account as well as in my IRA, I just figured that with such little tax advantaged space I should try and get my bonds out of them. Would that not be correct?

My current breakdown is as follows:

Roth IRA (~25% of my total investments) - 100% Total Stock Market
Traditional IRA (~25% of my total investments) - 60% Total Bond, 12.5% Total International, 27.5% Total Stock Market
Brokerage (~50% of my total investments) - an almost even split of Total Stock Market vs Total International

I did TLH VXUS into VEU last year just to see what the process was like. I now regret that as I was hoping to keep things simple, and now I own both VXUS and VEU while saving myself a negligible amount in taxable income.

I also think I am going to forego my ibond holding as I truly do hate treasurydirect and have been anxiously waiting for January to roll around so I can pull out last year's investment. And as far as my investing goes, I have direct deposit setup with work to send a specific amount into my brokerage account every Friday. I keep a small amount of cash on hand and everything else I throw into the market. I do not even have an emergency fund as I assume I could just piggyback on my credit cards and brokerage account/roth ira if things really got bad.

I think I'm going to aim for something more along the lines of:

50% Total Bond in tIRA (is there any benefit to leaving this here? should i just send everything to taxable?)
25% NY State Tax Exempt in taxable account
25% Intermediate Investment in taxable

Anyways, given the new light that I do own Total Stock Market and Total International in my brokerage account as well as my IRAs, does it still make sense to try and get my bonds into my taxable accounts to free up tax advantaged space for more equities? Is my asset allocation ok otherwise in terms of how it's split amongst my accounts?

Thanks!

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Re: EE/Ibonds & Tax Advantaged Space

Post by Grt2bOutdoors » Mon Oct 16, 2017 8:21 pm

Looks good to me. :beer
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Re: EE/Ibonds & Tax Advantaged Space

Post by #Cruncher » Tue Oct 17, 2017 12:46 am

cjg wrote:
Sun Oct 15, 2017 8:09 pm
If you have the same marginal tax rate today until you cash them out, the tax advantage of I and EE Bonds is equivalent to interest on interest being tax free.
I was not aware of this and, at first, didn't think it was correct. The following little table shows how I would normally compute the after tax value for a $10,000 I Bond that grows 2% every year for 30 years and is taxed at 25% at that time:

Code: Select all

Principal               10,000 
Term                        30
Pretax growth               2%
Grows to before taxes   18,114 = 10000 * 1.02 ^ 30
Interest to be taxed     8,114 = 18114 - 10000
Tax rate                   25%
Tax                      2,028 =  8114 * 0.25
Value after tax         16,085 = 18114 - 2028
And the following long table shows how we get the same $16,085 value by deducting the tax on only the simple interest each year, demonstrating how you are correct, cjg.

Code: Select all

               25% Tax
        2%   on Simple
Year  Growth  Interest    Balance

Code: Select all

   0                       10,000
   1     200        50     10,150
   2     203        50     10,303
   3     206        50     10,459
   4     209        50     10,618
   5     212        50     10,781
   6     216        50     10,946
   7     219        50     11,115
   8     222        50     11,287
   9     226        50     11,463
  10     229        50     11,642
  11     233        50     11,825
  12     237        50     12,012
  13     240        50     12,202
  14     244        50     12,396
  15     248        50     12,594
  16     252        50     12,796
  17     256        50     13,002
  18     260        50     13,212
  19     264        50     13,426
  20     269        50     13,645
  21     273        50     13,867
  22     277        50     14,095
  23     282        50     14,327
  24     287        50     14,563
  25     291        50     14,805
  26     296        50     15,051
  27     301        50     15,302
  28     306        50     15,558
  29     311        50     15,819
  30     316        50     16,085
       -----     -----
Total  7,585     1,500
The $50 deducted each year can be thought of as an annuity growing at 2% which offsets, rather than complements, the growth of the initial $10,000. Thus, we can use the Excel FV function to compute the result:
16,085 = FV(2%, 30, 50, -10000, 0)

The FV function combines the formulas for the Future Value of $1 (FV$1) and the Future Value of an Annuity of $1 (FVA$1):

Code: Select all

where i = interest rate
      n = number of periods

FV$1  = (1 + i) ^ n    = Future Value of $1
FVA$1 = (FV$1 - 1) / i = Future Value of Annuity of $1
The following shows why my method (call it A) at the top of the post is equivalent to using the FV$1 and FVA$1 formulas (call it method B). Note how the expression in line (4) is the same as the one in line (1).

Code: Select all

where t = tax rate

Computing after tax value with method A:
   $1 Grows to  -      Tax
   -----------     --------------
1)     FV$1     -  t * (FV$1 - 1)

Computing after tax value with method B:
   $1 Grows to  -   Annual Tax Grows to
   -----------     ----------------------
2)     FV$1     -  i * t *  FVA$1
3)     FV$1     -  i * t * (FV$1 - 1) / i (substitute for FVA$1)
4)     FV$1     -      t * (FV$1 - 1)     (eliminate i)

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