I Bonds and New Tax Law -- any changes?

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GreenGrowTheDollars
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I Bonds and New Tax Law -- any changes?

Post by GreenGrowTheDollars » Tue Jan 09, 2018 10:57 pm

We're considering buying I Bonds this year - $10K for each of us. Do any of the new tax law changes affect the desirability of I Bonds relative to other bond-type investments?

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Mel Lindauer
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Re: I Bonds and New Tax Law -- any changes?

Post by Mel Lindauer » Tue Jan 09, 2018 11:04 pm

GreenGrowTheDollars wrote:
Tue Jan 09, 2018 10:57 pm
We're considering buying I Bonds this year - $10K for each of us. Do any of the new tax law changes affect the desirability of I Bonds relative to other bond-type investments?
None that I'm aware of except that, upon redemption, the tax rate on the interest earned may well be in a lower tax bracket, all other things being equal.
Best Regards - Mel | | Semper Fi

PFInterest
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Re: I Bonds and New Tax Law -- any changes?

Post by PFInterest » Tue Jan 09, 2018 11:04 pm

Nope.

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Re: I Bonds and New Tax Law -- any changes?

Post by grabiner » Tue Jan 09, 2018 11:05 pm

There are some minor issues.

The tax deferral becomes less valuable under the new tax law if you move to a lower marginal tax rate for the next eight years and then move back up when you cash in the bonds. If you expect to cash in the bonds within eight years, the tax deferral has about the same benefit.

The state tax exemption is worth slightly more, since you are likely either not to itemize deductions or to hit the $10K SALT limit.

They are still probably the best bonds for a taxable account.
Wiki David Grabiner

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WoodSpinner
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Re: I Bonds and New Tax Law -- any changes?

Post by WoodSpinner » Tue Jan 09, 2018 11:35 pm

grabiner wrote:
Tue Jan 09, 2018 11:05 pm
There are some minor issues.

The tax deferral becomes less valuable under the new tax law if you move to a lower marginal tax rate for the next eight years and then move back up when you cash in the bonds. If you expect to cash in the bonds within eight years, the tax deferral has about the same benefit.

The state tax exemption is worth slightly more, since you are likely either not to itemize deductions or to hit the $10K SALT limit.

They are still probably the best bonds for a taxable account.
Could you help me understand a bit more why you like them for Taxable?

Not sure if I am missing something....

WoodSpinner

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grabiner
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Re: I Bonds and New Tax Law -- any changes?

Post by grabiner » Tue Jan 09, 2018 11:44 pm

WoodSpinner wrote:
Tue Jan 09, 2018 11:35 pm
grabiner wrote:
Tue Jan 09, 2018 11:05 pm
There are some minor issues.

The tax deferral becomes less valuable under the new tax law if you move to a lower marginal tax rate for the next eight years and then move back up when you cash in the bonds. If you expect to cash in the bonds within eight years, the tax deferral has about the same benefit.

The state tax exemption is worth slightly more, since you are likely either not to itemize deductions or to hit the $10K SALT limit.

They are still probably the best bonds for a taxable account.
Could you help me understand a bit more why you like them for Taxable?
I like them in a taxable account because they have no credit risk, state tax exemption, federal tax deferral (for up to 30 years), and liquidity with no interest-rate risk. You might get a bit more if you buy a 30-year TIPS and hold it to maturity (although you will pay tax every year), but if you need to sell the TIPS before it matures, you take interest-rate risk. If you need to sell a 2018 I-Bond in 2028, you can earn the guaranteed rate.
Wiki David Grabiner

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Mel Lindauer
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Re: I Bonds and New Tax Law -- any changes?

Post by Mel Lindauer » Tue Jan 09, 2018 11:58 pm

WoodSpinner wrote:
Tue Jan 09, 2018 11:35 pm

Could you help me understand a bit more why you like them for Taxable?

Not sure if I am missing something....

WoodSpinner
I'll give you two good reasons:
1. They provide additional tax deferred space for up to 30 years even though they're held in your taxable account.
2. You can't put them in a tax-deferred account.
(While there are no legal restrictions, there are no custodians who will hold your I Bonds in an IRA account, so for all practical purposes, you can't put them in an IRA because IRAs require a custodian.)
Best Regards - Mel | | Semper Fi

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WoodSpinner
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Re: I Bonds and New Tax Law -- any changes?

Post by WoodSpinner » Wed Jan 10, 2018 12:05 am

Mel Lindauer wrote:
Tue Jan 09, 2018 11:58 pm
WoodSpinner wrote:
Tue Jan 09, 2018 11:35 pm

Could you help me understand a bit more why you like them for Taxable?

Not sure if I am missing something....

WoodSpinner
I'll give you two good reasons:
1. They provide additional tax deferred space for up to 30 years even though they're held in your taxable account.
2. You can't put them in a tax-deferred account.
(While there are no legal restrictions, there are no custodians who will hold your I Bonds in an IRA account, so for all practical purposes, you can't put them in an IRA because IRAs require a custodian.)
Mel,

Fair enough, let me amend the question, why chose them over other bond alternatives formtaxable?

TIA

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Mel Lindauer
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Re: I Bonds and New Tax Law -- any changes?

Post by Mel Lindauer » Wed Jan 10, 2018 12:11 am

WoodSpinner wrote:
Wed Jan 10, 2018 12:05 am
Mel Lindauer wrote:
Tue Jan 09, 2018 11:58 pm
WoodSpinner wrote:
Tue Jan 09, 2018 11:35 pm

Could you help me understand a bit more why you like them for Taxable?

Not sure if I am missing something....

WoodSpinner
I'll give you two good reasons:
1. They provide additional tax deferred space for up to 30 years even though they're held in your taxable account.
2. You can't put them in a tax-deferred account.
(While there are no legal restrictions, there are no custodians who will hold your I Bonds in an IRA account, so for all practical purposes, you can't put them in an IRA because IRAs require a custodian.)
Mel,

Fair enough, let me amend the question, why chose them over other bond alternatives formtaxable?

TIA
1. They provide additional tax-deferred space.
2. They're risk free and guaranteed to keep up with inflation before taxes whereas other bonds don't provide both of those guarantees.
3. They can be used for tax shifting by using the tax-deferral while you're in a high tax bracket to at later time when you're in a lower tax bracket (laid off, retired).
4. They can be used tax-free for qualifying educational expenses.
Best Regards - Mel | | Semper Fi

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WoodSpinner
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Re: I Bonds and New Tax Law -- any changes?

Post by WoodSpinner » Wed Jan 10, 2018 9:11 am

Mel,

Thanks, I have some homework to do.

WoodSpinner

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Mel Lindauer
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Re: I Bonds and New Tax Law -- any changes?

Post by Mel Lindauer » Wed Jan 10, 2018 11:39 am

WoodSpinner wrote:
Wed Jan 10, 2018 9:11 am
Mel,

Thanks, I have some homework to do.

WoodSpinner
Having pointed out some reasons to continue to buy and hold I Bonds, I have a hard time getting exciting about buying any more myself after getting them at 3.0, 3.3, 3.4 and 3.6% over and above inflation. Those days are long gone and investors need to decide whether today's I Bonds still make sense for them, given the benefits I pointed out in my previous post.
Best Regards - Mel | | Semper Fi

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HueyLD
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Re: I Bonds and New Tax Law -- any changes?

Post by HueyLD » Wed Jan 10, 2018 11:45 am

grabiner wrote:
Tue Jan 09, 2018 11:05 pm
There are some minor issues.

The tax deferral becomes less valuable under the new tax law if you move to a lower marginal tax rate for the next eight years and then move back up when you cash in the bonds. If you expect to cash in the bonds within eight years, the tax deferral has about the same benefit.

The state tax exemption is worth slightly more, since you are likely either not to itemize deductions or to hit the $10K SALT limit.

They are still probably the best bonds for a taxable account.
The sunset timeframe may cause problems in eight years.

However, I have no clue what the then Congress and Executive branch may do to address the sunset.

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Re: I Bonds and New Tax Law -- any changes?

Post by jmk » Wed Jan 10, 2018 12:04 pm

Mel Lindauer wrote:
Wed Jan 10, 2018 12:11 am
4. They can be used tax-free for qualifying educational expenses.
This last one is often overlooked. I'm using my ibonds to pay for our child's tuition in 10 years in lieu of a 529. Even with cashing them in a few years early, it makes more sense than a 529 since I would be paying income tax otherwise and my tax rates will be low at that point anyway. Unlike a 529 the tax free use of bonds only covers tuition however, not room and board.

One thing I'm struggling with is which ibonds to use: the 1.1% rate or the 3.6% rate? Cashing them in early forgoes higher rates of return but also eliminates higher rates of tax. So not sure which makes sense.

anoop
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Re: I Bonds and New Tax Law -- any changes?

Post by anoop » Wed Jan 10, 2018 12:14 pm

jmk wrote:
Wed Jan 10, 2018 12:04 pm
Mel Lindauer wrote:
Wed Jan 10, 2018 12:11 am
4. They can be used tax-free for qualifying educational expenses.
This last one is often overlooked. I'm using my ibonds to pay for our child's tuition in 10 years in lieu of a 529. Even with cashing them in a few years early, it makes more sense than a 529 since I would be paying income tax otherwise and my tax rates will be low at that point anyway. Unlike a 529 the tax free use of bonds only covers tuition however, not room and board.

One thing I'm struggling with is which ibonds to use: the 1.1% rate or the 3.6% rate? Cashing them in early forgoes higher rates of return but also eliminates higher rates of tax. So not sure which makes sense.
I'm no expert, but if I were in your situation, I would try to grab as much as I could tax-free NOW without regard to what it's doing to my future rate of return. This is for two reasons -- I don't know if I will be alive in the future; and I have no idea what tax rates or my tax situation will be in the future.

This is the reason why I have always preferred traditional 401k over roth 401k.

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Re: I Bonds and New Tax Law -- any changes?

Post by GreenGrowTheDollars » Wed Jan 10, 2018 3:30 pm

I understand that I can buy a maximum of $10K/year using one social security number. Do the bonds need to be titled just to that social security number, or can I specify joint ownership? And, if I die with uncashed bonds, does the POD recipient pay taxes on the bond income just as I would have?

(Thanks for all the help with the original question.)

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Re: I Bonds and New Tax Law -- any changes?

Post by Mel Lindauer » Wed Jan 10, 2018 4:35 pm

GreenGrowTheDollars wrote:
Wed Jan 10, 2018 3:30 pm
I understand that I can buy a maximum of $10K/year using one social security number. Do the bonds need to be titled just to that social security number, or can I specify joint ownership? And, if I die with uncashed bonds, does the POD recipient pay taxes on the bond income just as I would have?

(Thanks for all the help with the original question.)
You can have an owner and co-owner or an owner and a beneficiary. At the owner's death, they automatically become the sole property of the named co-owner who can continue to hold the bonds until maturity or redeem them and pay taxes as desired. Same goes for the beneficiary except they need to provide proof of death.
Best Regards - Mel | | Semper Fi

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HueyLD
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Re: I Bonds and New Tax Law -- any changes?

Post by HueyLD » Wed Jan 10, 2018 5:17 pm

Mel Lindauer wrote:
Wed Jan 10, 2018 4:35 pm
GreenGrowTheDollars wrote:
Wed Jan 10, 2018 3:30 pm
I understand that I can buy a maximum of $10K/year using one social security number. Do the bonds need to be titled just to that social security number, or can I specify joint ownership? And, if I die with uncashed bonds, does the POD recipient pay taxes on the bond income just as I would have?

(Thanks for all the help with the original question.)
You can have an owner and co-owner or an owner and a beneficiary. At the owner's death, they automatically become the sole property of the named co-owner who can continue to hold the bonds until maturity or redeem them and pay taxes as desired. Same goes for the beneficiary except they need to provide proof of death.
What Mel said applies to paper bonds only, but the Treasury no longer offers paper bonds except for tax refunds.

For electronic bonds purchased on the TreasuryDirect (TD), you can have a “primary” owner “with” a “secondary” owner. There is no co-ownership or joint ownership available for electronic bonds. The secondary owner does not have any transaction rights unless (s)he has been explicitly given such a right by the primary owner. Upon the death of the primary owner, the secondary owner needs a certified copy of the death certificate in order to become the owner, just like a beneficiary.

I am not quite sure if the secondary owner with transaction rights can just move the bonds to his/her own TD account after the death of the primary owner without a certified death certificate.

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Mel Lindauer
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Re: I Bonds and New Tax Law -- any changes?

Post by Mel Lindauer » Wed Jan 10, 2018 8:13 pm

HueyLD wrote:
Wed Jan 10, 2018 5:17 pm
Mel Lindauer wrote:
Wed Jan 10, 2018 4:35 pm
GreenGrowTheDollars wrote:
Wed Jan 10, 2018 3:30 pm
I understand that I can buy a maximum of $10K/year using one social security number. Do the bonds need to be titled just to that social security number, or can I specify joint ownership? And, if I die with uncashed bonds, does the POD recipient pay taxes on the bond income just as I would have?

(Thanks for all the help with the original question.)
You can have an owner and co-owner or an owner and a beneficiary. At the owner's death, they automatically become the sole property of the named co-owner who can continue to hold the bonds until maturity or redeem them and pay taxes as desired. Same goes for the beneficiary except they need to provide proof of death.
What Mel said applies to paper bonds only, but the Treasury no longer offers paper bonds except for tax refunds.

For electronic bonds purchased on the TreasuryDirect (TD), you can have a “primary” owner “with” a “secondary” owner. There is no co-ownership or joint ownership available for electronic bonds. The secondary owner does not have any transaction rights unless (s)he has been explicitly given such a right by the primary owner. Upon the death of the primary owner, the secondary owner needs a certified copy of the death certificate in order to become the owner, just like a beneficiary.

I am not quite sure if the secondary owner with transaction rights can just move the bonds to his/her own TD account after the death of the primary owner without a certified death certificate.
Thanks, HueyLD. I should have stated that my response applied to paper I Bonds (I don't use TD).
Best Regards - Mel | | Semper Fi

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Mel Lindauer
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Re: I Bonds and New Tax Law -- any changes?

Post by Mel Lindauer » Wed Jan 10, 2018 8:17 pm

jmk wrote:
Wed Jan 10, 2018 12:04 pm
Mel Lindauer wrote:
Wed Jan 10, 2018 12:11 am
4. They can be used tax-free for qualifying educational expenses.
This last one is often overlooked. I'm using my ibonds to pay for our child's tuition in 10 years in lieu of a 529. Even with cashing them in a few years early, it makes more sense than a 529 since I would be paying income tax otherwise and my tax rates will be low at that point anyway. Unlike a 529 the tax free use of bonds only covers tuition however, not room and board.

One thing I'm struggling with is which ibonds to use: the 1.1% rate or the 3.6% rate? Cashing them in early forgoes higher rates of return but also eliminates higher rates of tax. So not sure which makes sense.
That is a tough decision (higher tax forgiveness or higher future returns). I'll probably still be clutching my 3.6% I Bonds while laying in my casket! :-)
Best Regards - Mel | | Semper Fi

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Re: I Bonds and New Tax Law -- any changes?

Post by BogleMelon » Wed Jan 10, 2018 9:16 pm

Mel Lindauer wrote:
Wed Jan 10, 2018 12:11 am
WoodSpinner wrote:
Wed Jan 10, 2018 12:05 am
Mel Lindauer wrote:
Tue Jan 09, 2018 11:58 pm
WoodSpinner wrote:
Tue Jan 09, 2018 11:35 pm

Could you help me understand a bit more why you like them for Taxable?

Not sure if I am missing something....

WoodSpinner
I'll give you two good reasons:
1. They provide additional tax deferred space for up to 30 years even though they're held in your taxable account.
2. You can't put them in a tax-deferred account.
(While there are no legal restrictions, there are no custodians who will hold your I Bonds in an IRA account, so for all practical purposes, you can't put them in an IRA because IRAs require a custodian.)
Mel,

Fair enough, let me amend the question, why chose them over other bond alternatives formtaxable?

TIA
1. They provide additional tax-deferred space.
2. They're risk free and guaranteed to keep up with inflation before taxes whereas other bonds don't provide both of those guarantees.
3. They can be used for tax shifting by using the tax-deferral while you're in a high tax bracket to at later time when you're in a lower tax bracket (laid off, retired).
4. They can be used tax-free for qualifying educational expenses.
5. They earn interest retroactive (Day 1 of the month), even though you purchase them at day 30. That makes you able to double dip the interest twice for this month, your bank interest and I bonds! :beer
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

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