i-bonds vs muni bond

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l1am
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i-bonds vs muni bond

Post by l1am » Sat Nov 03, 2018 12:07 am

I have $10k to invest. I want to de-risk my taxable account a bit more, so I'm considering adding to my VWIUX holding (2.75%), or buying some i-bonds (2.83%).

What are the typical things I should consider here? Just how much risk I'm willing to absorb? Does this question become kind of redundant when you consider I have 85%+ equities in the account anyway, and bonds pretty much do the job?

Also my marginal fed rate is ~35%, and this is pushing me towards the muni bonds. I understand the goal of i-bonds is really to protect capital against inflation, so maybe I should just move my emergency funds there instead of online savings?

PFInterest
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Re: i-bonds vs muni bond

Post by PFInterest » Sat Nov 03, 2018 8:44 am

or you could buy stocks and increase your FI in an employer retirement plan.

carolinaman
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Re: i-bonds vs muni bond

Post by carolinaman » Sat Nov 03, 2018 8:57 am

I think VWIUX is an excellent muni fund that invests in high quality munis. Your decision seems to hinge more on the tax considerations. At 35% marginal tax rate, this muni fund offers much better return net of taxes unless there is an alternative minimum tax impact (muni interest is included in alternative minimum tax calculation).

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Mel Lindauer
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Re: i-bonds vs muni bond

Post by Mel Lindauer » Sat Nov 03, 2018 2:39 pm

l1am wrote:
Sat Nov 03, 2018 12:07 am
I have $10k to invest. I want to de-risk my taxable account a bit more, so I'm considering adding to my VWIUX holding (2.75%), or buying some i-bonds (2.83%).

What are the typical things I should consider here? Just how much risk I'm willing to absorb? Does this question become kind of redundant when you consider I have 85%+ equities in the account anyway, and bonds pretty much do the job?

Also my marginal fed rate is ~35%, and this is pushing me towards the muni bonds. I understand the goal of i-bonds is really to protect capital against inflation, so maybe I should just move my emergency funds there instead of online savings?
The I Bonds are tax-deferred for up to 30 years. Depending on your current age, that 30 years might well take you into retirement and a much lower tax rate. They're also free from state and local taxation and can be used, tax-free, for qualifying educational expenses.
Best Regards - Mel | | Semper Fi

am
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Re: i-bonds vs muni bond

Post by am » Sat Nov 03, 2018 3:33 pm

Mel Lindauer wrote:
Sat Nov 03, 2018 2:39 pm
l1am wrote:
Sat Nov 03, 2018 12:07 am
I have $10k to invest. I want to de-risk my taxable account a bit more, so I'm considering adding to my VWIUX holding (2.75%), or buying some i-bonds (2.83%).

What are the typical things I should consider here? Just how much risk I'm willing to absorb? Does this question become kind of redundant when you consider I have 85%+ equities in the account anyway, and bonds pretty much do the job?

Also my marginal fed rate is ~35%, and this is pushing me towards the muni bonds. I understand the goal of i-bonds is really to protect capital against inflation, so maybe I should just move my emergency funds there instead of online savings?
The I Bonds are tax-deferred for up to 30 years. Depending on your current age, that 30 years might well take you into retirement and a much lower tax rate. They're also free from state and local taxation and can be used, tax-free, for qualifying educational expenses.
Now with a .5% fixed rate and being less than 30 yrs away from retirement, they make a lot of sense even at high bracket. I’m buying 20k now (myself and wife) for the first time. Plan to buy more in Jan.

The rest of my taxable fixed income may go into int. Muni fund or cds. Munis kind of make me nervous given all the pension underfunding and relatively low rewards compared to intermediate CDs. Plus I really like my fixed income in taxable being fixed in amount :D

l1am
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Re: i-bonds vs muni bond

Post by l1am » Sun Nov 04, 2018 10:08 pm

Mel Lindauer wrote:
Sat Nov 03, 2018 2:39 pm
The I Bonds are tax-deferred for up to 30 years. Depending on your current age, that 30 years might well take you into retirement and a much lower tax rate. They're also free from state and local taxation and can be used, tax-free, for qualifying educational expenses.
Aren't 529 plans better for educational expenses (comparison link)?

Also I did some math here, turns out (with current rate assumptions of course):
- I-Bonds beat muni iff Fed rate <=12%
- Total bond beats muni iff Fed rate <=16%

Image

One advantage of i-bonds is the deferred interest, it's captured in the calculations above but also did some calculations with arbitrary numbers and it seems very insignificant (I'm assuming the interest is taxed upon withdrawal):
Image

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Re: i-bonds vs muni bond

Post by Mel Lindauer » Mon Nov 05, 2018 1:40 pm

l1am wrote:
Sun Nov 04, 2018 10:08 pm
Mel Lindauer wrote:
Sat Nov 03, 2018 2:39 pm
The I Bonds are tax-deferred for up to 30 years. Depending on your current age, that 30 years might well take you into retirement and a much lower tax rate. They're also free from state and local taxation and can be used, tax-free, for qualifying educational expenses.
Aren't 529 plans better for educational expenses (comparison link)?

Also I did some math here, turns out (with current rate assumptions of course):
- I-Bonds beat muni iff Fed rate <=12%
- Total bond beats muni iff Fed rate <=16%

Image

One advantage of i-bonds is the deferred interest, it's captured in the calculations above but also did some calculations with arbitrary numbers and it seems very insignificant (I'm assuming the interest is taxed upon withdrawal):
Image
Actually, if one redeems I Bonds and puts the entire proceeds into a 529 Plan, that qualifies for the tax-free treatment on the I Bond interest, since the 529 is a qualifying educational expense.

That's an especially valuable option for those folks who own older I Bonds with high fixed rates (some were 3.0, 3.3, 3.4 and 3.6% fixed) but find that their income is going to be too high to qualify for the educational benefit when their kids reach college age.

They can redeem now while they're still below the income cut-off limit and put it into a 529 and that will make them tax-free.
Best Regards - Mel | | Semper Fi

l1am
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Re: i-bonds vs muni bond

Post by l1am » Mon Nov 12, 2018 2:17 am

Mel Lindauer wrote:
Mon Nov 05, 2018 1:40 pm
Actually, if one redeems I Bonds and puts the entire proceeds into a 529 Plan, that qualifies for the tax-free treatment on the I Bond interest, since the 529 is a qualifying educational expense.
I didn't know that, thanks.

Honestly I'm still struggling with the real point of i-bonds, aside from emergency fund.

Is it sort of an insurance against stock and bonds collapsing - like you'll still have those ibonds if all goes south?

I already see bonds as a mechanism to lower volatility in my portfolio, so why add in CDs or i-bonds? If I want to lower risk, can't I just allocate more bonds vs. stocks... the risk/reward just seems better with munis.

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Re: i-bonds vs muni bond

Post by Mel Lindauer » Mon Nov 12, 2018 12:57 pm

l1am wrote:
Mon Nov 12, 2018 2:17 am
Mel Lindauer wrote:
Mon Nov 05, 2018 1:40 pm
Actually, if one redeems I Bonds and puts the entire proceeds into a 529 Plan, that qualifies for the tax-free treatment on the I Bond interest, since the 529 is a qualifying educational expense.
I didn't know that, thanks.

Honestly I'm still struggling with the real point of i-bonds, aside from emergency fund.

Is it sort of an insurance against stock and bonds collapsing - like you'll still have those ibonds if all goes south?

I already see bonds as a mechanism to lower volatility in my portfolio, so why add in CDs or i-bonds? If I want to lower risk, can't I just allocate more bonds vs. stocks... the risk/reward just seems better with munis.
The primary purpose of I Bonds is to.protect the future spending power of your curent assets in a risk-free way. They're also tax-deferred for up to 30 years and are free from state and local taxes. Finally, they can be used tax-free for qualifying educational expenses.

One needs to understand the difference between NOMINAL and REAL to understand the allure of I Bonds.

Just because you have more dollars when your CD matures doesn't mean that it's retained it's spending power if there was unanticipated inflation. With I Bonds, umexpected inflation isn't a worry.

The higher the inflation, the better I Bonds protect your future spending power.
Best Regards - Mel | | Semper Fi

l1am
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Re: i-bonds vs muni bond

Post by l1am » Wed Nov 14, 2018 8:25 pm

Mel Lindauer wrote:
Mon Nov 12, 2018 12:57 pm
The primary purpose of I Bonds is to.protect the future spending power of your curent assets in a risk-free way. They're also tax-deferred for up to 30 years and are free from state and local taxes. Finally, they can be used tax-free for qualifying educational expenses.

One needs to understand the difference between NOMINAL and REAL to understand the allure of I Bonds.

Just because you have more dollars when your CD matures doesn't mean that it's retained it's spending power if there was unanticipated inflation. With I Bonds, umexpected inflation isn't a worry.

The higher the inflation, the better I Bonds protect your future spending power.
Right, I see the distinction between CDs and iBonds. I'll chose iBonds over CDs.

It seems like more of a psychological safety net thing to chose iBonds over munis though. If one is willing to absorb risk in a portfolio (by having say, equities) then increasing muni bond allocation achieves the purpose of lowering the downside risk?

Like, why try to protect some piece of capital against inflation when you have 70%+ tied up in risky equities anyway.

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Re: i-bonds vs muni bond

Post by Mel Lindauer » Wed Nov 14, 2018 10:42 pm

l1am wrote:
Wed Nov 14, 2018 8:25 pm
Mel Lindauer wrote:
Mon Nov 12, 2018 12:57 pm
The primary purpose of I Bonds is to.protect the future spending power of your curent assets in a risk-free way. They're also tax-deferred for up to 30 years and are free from state and local taxes. Finally, they can be used tax-free for qualifying educational expenses.

One needs to understand the difference between NOMINAL and REAL to understand the allure of I Bonds.

Just because you have more dollars when your CD matures doesn't mean that it's retained it's spending power if there was unanticipated inflation. With I Bonds, umexpected inflation isn't a worry.

The higher the inflation, the better I Bonds protect your future spending power.
Right, I see the distinction between CDs and iBonds. I'll chose iBonds over CDs.

It seems like more of a psychological safety net thing to chose iBonds over munis though. If one is willing to absorb risk in a portfolio (by having say, equities) then increasing muni bond allocation achieves the purpose of lowering the downside risk?

Like, why try to protect some piece of capital against inflation when you have 70%+ tied up in risky equities anyway.
Your 70% in equities should outstrip inflation over the long haul. The real question is, can you stick with 70% and not bail out when the equity markets lose 50%, which isn't out of the question. Only those who have gone through a deep and drawn out bear market can answer that question.
Best Regards - Mel | | Semper Fi

l1am
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Re: i-bonds vs muni bond

Post by l1am » Fri Nov 16, 2018 4:54 pm

Mel Lindauer wrote:
Wed Nov 14, 2018 10:42 pm
Your 70% in equities should outstrip inflation over the long haul. The real question is, can you stick with 70% and not bail out when the equity markets lose 50%, which isn't out of the question. Only those who have gone through a deep and drawn out bear market can answer that question.
I won't bail. But I'm ~90% equities right now, so I'm gonna invest more in bonds to meet ~80/20 allocation, maybe 70/30. I know I might want to dig into my taxable account at some point (maybe buy a home etc.), so that's why I do invest in muni bonds there (VWIUX).

Still undecided on the iBonds. I also realized I likely won't be retired in 30 years when they mature so I'll have to pay the Fed tax rate whatever it is (unless I use for educational expenses of course, like siphon into a 529).

l1am
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Re: i-bonds vs muni bond

Post by l1am » Wed Nov 21, 2018 3:22 am

Anyone got more thoughts?

l1am
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Re: i-bonds vs muni bond

Post by l1am » Sun Nov 25, 2018 1:17 am

Alright, I'm going with munis. I'm 35 so might not even be retired by the time these mature (30 years), and the educational expenses exception has income limits too. Seems to make more sense to wait until I'm 40+ to invest in ibonds.

I would choose ibonds over CDs though, and if I decide to increase my EF beyond what I have in online savings, ibonds seem like a decent choice (although not sure how much better than munis they are as an EF).

WolfgangPauli
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Re: i-bonds vs muni bond

Post by WolfgangPauli » Sun Nov 25, 2018 7:42 am

Mel Lindauer wrote:
Sat Nov 03, 2018 2:39 pm
l1am wrote:
Sat Nov 03, 2018 12:07 am
I have $10k to invest. I want to de-risk my taxable account a bit more, so I'm considering adding to my VWIUX holding (2.75%), or buying some i-bonds (2.83%).

What are the typical things I should consider here? Just how much risk I'm willing to absorb? Does this question become kind of redundant when you consider I have 85%+ equities in the account anyway, and bonds pretty much do the job?

Also my marginal fed rate is ~35%, and this is pushing me towards the muni bonds. I understand the goal of i-bonds is really to protect capital against inflation, so maybe I should just move my emergency funds there instead of online savings?
The I Bonds are tax-deferred for up to 30 years. Depending on your current age, that 30 years might well take you into retirement and a much lower tax rate. They're also free from state and local taxation and can be used, tax-free, for qualifying educational expenses.
The OP states marginal tax rate is 35%. This would be an implied income of $400K to $600K which means there is no way the OP can deduct savings bond interest for educational purposes. This would skew heavily to the 529 if education reasons.
Twitter: @JAXbogleheads | EM: JAXbogleheads@gmail.com

WolfgangPauli
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Re: i-bonds vs muni bond

Post by WolfgangPauli » Sun Nov 25, 2018 7:45 am

l1am wrote:
Fri Nov 16, 2018 4:54 pm
Mel Lindauer wrote:
Wed Nov 14, 2018 10:42 pm
Your 70% in equities should outstrip inflation over the long haul. The real question is, can you stick with 70% and not bail out when the equity markets lose 50%, which isn't out of the question. Only those who have gone through a deep and drawn out bear market can answer that question.
I won't bail. But I'm ~90% equities right now, so I'm gonna invest more in bonds to meet ~80/20 allocation, maybe 70/30. I know I might want to dig into my taxable account at some point (maybe buy a home etc.), so that's why I do invest in muni bonds there (VWIUX).

Still undecided on the iBonds. I also realized I likely won't be retired in 30 years when they mature so I'll have to pay the Fed tax rate whatever it is (unless I use for educational expenses of course, like siphon into a 529).
Again, if you are in the 35% tax bracket you cannot use for educational expenses. I doubt your income will go from $400k to $600k down to $150K unless you spend a lot of what you are earning now or unless you just had one "good year". You will be surprised, making that kind of money, how much you will have in the bank when you retire and decreasing lifestyle that much would be very hard.
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l1am
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Re: i-bonds vs muni bond

Post by l1am » Sun Nov 25, 2018 2:12 pm

WolfgangPauli wrote:
Sun Nov 25, 2018 7:42 am
The OP states marginal tax rate is 35%. This would be an implied income of $400K to $600K which means there is no way the OP can deduct savings bond interest for educational purposes. This would skew heavily to the 529 if education reasons.
I’m not married.

WolfgangPauli
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Re: i-bonds vs muni bond

Post by WolfgangPauli » Sun Dec 02, 2018 8:03 am

l1am wrote:
Sun Nov 25, 2018 2:12 pm
WolfgangPauli wrote:
Sun Nov 25, 2018 7:42 am
The OP states marginal tax rate is 35%. This would be an implied income of $400K to $600K which means there is no way the OP can deduct savings bond interest for educational purposes. This would skew heavily to the 529 if education reasons.
I’m not married.
Either way.. if you are in the 35% tax bracket you are well on your way to a very lucrative career and I would not count these I-Bonds for education.
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WolfgangPauli
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Re: i-bonds vs muni bond

Post by WolfgangPauli » Sun Dec 02, 2018 8:05 am

l1am wrote:
Sun Nov 25, 2018 2:12 pm
WolfgangPauli wrote:
Sun Nov 25, 2018 7:42 am
The OP states marginal tax rate is 35%. This would be an implied income of $400K to $600K which means there is no way the OP can deduct savings bond interest for educational purposes. This would skew heavily to the 529 if education reasons.
I’m not married.
35% tax bracket is $200K .. Too high to use these for education ..
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