I-savings bonds: To do or not to do

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ThisJustIn
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I-savings bonds: To do or not to do

Post by ThisJustIn » Sun Sep 23, 2018 12:59 am

I'm still debating investing in I-savings bonds for short-term investment (although they can be cashed out after 5+ years without penalty).

Properties of I-savings bonds are: Your money earns as much as inflation rate, so you are on par. Tax payment is deferred until you cash out, in a taxable money / account. Returns are state-tax exempt (so are treasury bonds). Yearly Limit is $10K per SSN. If you withdraw before 5 years, you pay 3 month of interest as penalty. Also, the rates are updated every 6 months based on CPI, and there are times

Other alternatives in taxable accounts for short-term /safer investments are: Treasury bonds, tax-exempt muni-bonds.

I hold tax-exempt muni-bonds in my 3-fund portfolios. I also hold Treasure bonds, but as their maturity date come, now I'm cashing them out and depositing the money into online savings accounts (1.85% in Synchrony, which is subject to federal tax + state tax, which is ~43% for me.)

Out of these investment options: CDs, online savings accounts, tax-exempt muni-bonds, treasury bonds, I-savings bonds => Would you or do you invest in I-savings bonds, knowing that the earliest you can withdraw without penalty is 5 years later? Do you invest in stock market instead? What is bogleheads view of I-savings bonds?

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GoldStar
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Re: I-savings bonds: To do or not to do

Post by GoldStar » Sun Sep 23, 2018 5:16 am

I don't believe it has to be an either/or question.
I decided to put 20% of my bond allocation into inflation protected bonds of which a portion is iBonds.
I also view iBonds as a second tier emergency account.

You should decide on your overall allocation first and then decide how iBonds fit.

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nisiprius
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Re: I-savings bonds: To do or not to do

Post by nisiprius » Sun Sep 23, 2018 5:58 am

The only "hard" delay is the initial year. You can redeem them as soon as one year after purchase. The penalty for redemption is only three months' interest, so even after one year you have not lost money. I almost ignore the penalty in my thinking.

The tables at eyebonds.info are very useful. They don't show the penalty: "I Bonds can't be redeemed before one year; and if held less than five years, the last three month's interest is forfeit. Therefore, if redeemed between one and five years, you will receive the value shown for three months before redemption." If you look at, say, the values for a $1,000 bond purchased on in October, 2012

http://eyebonds.info/ibonds/1000/ib_2012_10.html

then if I'm counting months correctly, you couldn't redeem the bond until October 2013; at that point the redemption value would have been the value shown for July = $1,015.60. In September, 2017, it is growing at about $2.40/month and reaches June = $1,062.80. In October, the five years having been elapsed, the value jumps to that shown for October = $1,072.80, i.e. a full $10.
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Re: I-savings bonds: To do or not to do

Post by z3r0c00l » Sun Sep 23, 2018 6:26 am

Yes I personally prefer these to CDs as long as $10,000 a year is sufficient to meet your needs. It meets my needs for this kind of safe investment (3rd tier emergency fund) so I buy them each year to keep the right ratio with stocks. It resembles a 5 year, infinite raise-your-rate CD in my mind. .3% plus inflation isn't so bad, the best sure thing out there imho. If they offered 2-3% over inflation like was once done in the past, I would consider it the best investment opportunity out there. Nothing else offers this guaranty to beat inflation without any risk.

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Watty
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Re: I-savings bonds: To do or not to do

Post by Watty » Sun Sep 23, 2018 7:38 am

ThisJustIn wrote:
Sun Sep 23, 2018 12:59 am
What is bogleheads view of I-savings bonds?
I don't know if there is a general consensus but my personal opinion is that I do not like them at the current interest rates except for a few special situations. My reasons are;

1) You can only own them in a taxable account so after paying taxes you are pretty well guaranteed to lose purchasing power when you cash them. You can own TIPS in a retirement account like a Roth or IRA so with them you can at least retain your purchasing power.

2) They are one of the few investments that do not get a stepped up cost basis when they go to your estate.

3) You usually have to deal with treasury direct which has apparently improved some but some people have had problems dealing with them. I have not heard of anyone that had a problem but apparently treasury direct does not promise to protect you if your account is hacked and you are not to blame. Most brokerages and mutual funds provide fraud protection if your account is hacked.

There can be some situations where they make sense for thing like an emergency fund or college savings but at the current interest rates they make little sense to me.

I do have some old paper iBonds that pay 3% above inflation and if the rates ever get back to that level again they could make sense.

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Re: I-savings bonds: To do or not to do

Post by blevine » Sun Sep 23, 2018 7:58 am

Benefits

1) 0 expenses (no commission nor fund er)

2) another tax advantaged option
if you maxed ira/401k accts

3) as emergency acct, great secondary
for extended unemployment, low tax bracket at time of withdrawal means even more tax advantaged. If kids in college during such a low income period, no tax at all.

4) Custodian diversification. I have had no issues with TD website and service, and glad not all my $ are in one broker/fund vendor.

5) Rates reasonable given low risk, yes they were better in the past, but one must look at options today, not in the past

If 10k/yr is not meaningful (lucky you) then get E and i bonds, if you consider for longer term (E is great if you hold 20 years and has same tax benefits. I bought both annually when I was in my 30s and 40s, now saved a nice emergency fund that also has long term benefits if I do not have an emergency. Best of both worlds. Once you get past those 1 and 5 year hurdles, you can lower other emergency funds to move to long term investments, this can become primary or secondary to a very small EF. ER becomes zero drag on your portfolio.

Cons are just those 2 hurdles IMO, but I was planning ahead, the hurdles are past and now my EF is shrinking to account for the growing balance of penalty free balance at TD. I plan to spend down the older EF to pay college bills and not replenish it since I have the E and I bond portfolio built years ago.

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Re: I-savings bonds: To do or not to do

Post by noco-hawkeye » Sun Sep 23, 2018 8:06 am

The vanguard money market is now above 2%, which might deserve some attention for at least part of your emergency savings or more stable money.

I don't work with I-Bonds, but have been curious about them. I've just stuck with tax exempt bond funds, which is the closest I think I have to what an I-Bond would be like. It seemed like I-Bonds made sense in some situations, it just wasn't worth the extra effort / complexity to me.

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Re: I-savings bonds: To do or not to do

Post by gmaynardkrebs » Sun Sep 23, 2018 8:57 am

I'd also look at Vanguard's short term muni fund, duration is only 1.1y and paying about 1.7% federal tax free, which is extremely attractive if you are in a higher bracket. (Note: Some states tax muni income.) I think of I-Bonds as more of a long term investment that should be part of your "safe" allocation. I find TD a PIA, but most people do not.

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Re: I-savings bonds: To do or not to do

Post by nisiprius » Sun Sep 23, 2018 9:42 am

With regard to Treasury bonds or municipal bonds, you're missing the great big thing: series I savings bonds have no interest rate risk. They are not marketable, they are not sold on the market, and the prevailing interest rate does not enter into calculating their redemption value. If interest rates rise, their redemption value does not fall.

This makes them different from almost else called "bonds."

With normal "bonds", if interest rates rise, you wish you could dump your old ones exchange them, bond for bond, for the new bonds paying the the higher rate. Unfortunately, the irrefragible logic of bond math says that if interest rates rise, the market value of your bonds drops by exactly the amount needed to erase any benefit from making that exchange. Because your bonds have dropped in value, the money you can make by selling your them on the market only lets you buy fewer of the new higher interest bonds.

This is not true with series I savings bonds. The redemption dollar value only goes up. If interest rates go up, you actually can redeem your old I bonds and buy the same dollar value of higher-rate new I bonds (although the annual purchase limit comes into play here).

They should be compared with other almost-riskless, highly liquid, cash-like-interest-paying assets: bank savings accounts, Treasury bills, and money market mutual funds.

Every time I've ever looked at series I savings bonds, the conclusion I've come to is that, compared to other near-riskless investments, they are a no-brainer. There's almost no reason not to buy them, except for potential nuisance issues in the purchase and redemption processes.

I haven't check the statistics but my impression is that series I savings bonds have always been competitive in total interest rate with the best savings accounts, Treasury bills, and money market mutual funds. You get inflation protection, directly linked to the CPI (no "historically-have-tended-to" nonsense).

The downside is concerns about the redemption process, the clunkiness of the Treasury Direct website, the discontinuation of paper bonds, and the diminishing number of banks that will redeem paper bonds; the initial one-year waiting period; and possible tax issues when the bonds are eventually redeemed.

For high-net-worth individuals, the annual purchase limit means that I bonds can never amount to more than chump change.

And, of course, if you want higher returns and don't mind higher risk, your personal risk/return equation might make other investments preferable.

I bonds are pretty good, and the reason you don't hear much about them, IMHO, is that there isn't anybody who can make much money out of telling you about them.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

am
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Re: I-savings bonds: To do or not to do

Post by am » Sun Sep 23, 2018 11:02 am

For higher brackets, I bonds will guarantee loss of spending power over time after redemption. I don’t use them for this reason.

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Re: I-savings bonds: To do or not to do

Post by gmaynardkrebs » Sun Sep 23, 2018 11:35 am

am wrote:
Sun Sep 23, 2018 11:02 am
For higher brackets, I bonds will guarantee loss of spending power over time after redemption. I don’t use them for this reason.
All returns are reduced by taxation. I-Bonds and TIPS are unique because they are the only investments that guarantee no loss of purchasing power pre-tax. Stocks and other bonds carry no such guarantee.

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