I bonds are only worth it with maxed retirement accounts right?

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MindlessPorcupine
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I bonds are only worth it with maxed retirement accounts right?

Post by MindlessPorcupine »

For example, if I'm not maxing out my 401k and Roth IRA, then I shouldn't be buying I Bonds from the Treasury Direct. It always makes more sense to be putting my bond allocation into a tax advantaged account over trying to buy I Bonds which must be in a taxable account, right?
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bligh
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by bligh »

In general, Yes, but not necessarily so. You need to look at your over all financial plan and asset allocation.

I am not sure if it is still the case, but for a good while I Bonds were a significantly better investment compared to owning TIPS in an IRA.

Also I Bonds provide you the option to access the funds without an early withdrawal penalty, nor do they force you to withdraw them at a certain schedule once you reach a certain age (they simply mature 30 years from when you bought them).
bhough
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by bhough »

That's the way I see the world, how you described. However, with the ultra low returns on stocks, bonds, and real estate, maybe the conventional wisdom will change. If your real expected return on a bond fund pretax is 0%, should you pay tax and buy an I bond with post tax money? I wouldn't if you are working and have access to a 401k or IRA.
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Nohbdy
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by Nohbdy »

MindlessPorcupine wrote: Tue Jun 08, 2021 10:33 am For example, if I'm not maxing out my 401k and Roth IRA, then I shouldn't be buying I Bonds from the Treasury Direct. It always makes more sense to be putting my bond allocation into a tax advantaged account over trying to buy I Bonds which must be in a taxable account, right?
If you are investing exclusively for retirement then you might be right.

I-bonds have better liquidity than 401k. If you have goals that are difficult to budget for such as child college savings you may not want to oversave in a dedicated 529 plan (because you may get a carpenter). I think after employee match, roth, then I-bonds could merit consideration before maxing 401k if your situation might demand liquidity (or potential liquidity) before 401k becomes conventionally available.

I-bonds also look great as a 2nd tier emergency fund (3 months cash, 3 months I-bonds).

This is an interesting question because I-bonds are basically a promise of zero real loss, zero real return (at least while base rate is zero). That type of safety is difficult to find elsewhere.
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by Thesaints »

I-bonds are different from whatever else you can put in a tax advantaged account.
It is a false comparison.
I-bonds are presently the best inflation-indexed option out there, hands down.
Maxing out your 401k has nothing to do with inflation protection.
wetgear
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by wetgear »

You have it right for most of the time but right now Ibonds are paying better than bonds you can buy elsewhere. This may change with interest and inflation rates though. It's also important to note that ibonds are federal tax differed (until redemption) and state tax free so even though it's in a "taxable" account it's sort of similar to a pre-tax account (trad 401k or IRA) with a state tax free bonus.
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hand
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by hand »

I bonds also have pretty great deflation protection and tax benefits should you have low income when paying for college.

Many of the benefits are edge cases, but they really are a unique animal that aren't discussed much by mainstream press and advisors because there's not an easy way for middlemen to make money.
calwatch
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by calwatch »

If you were saving for a new car or a house down payment I Bonds are great tools for those as well. You probably should take advantage of any Roth capacity that you have (even if it means opening a Roth savings account at Ally or one of the other online banks) first though, since that is more valuable in my opinion.
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ApeAttack
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by ApeAttack »

I have not maxed out my tax-advantaged space, but have some I-Bonds as part of my emergency fund due to their liquidity (after one year) and relatively high interest compared to savings accounts. The hedge against inflation is a nice bonus.
Just another lazy index investor who recently found out about I-Bonds (https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm).
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by vineviz »

MindlessPorcupine wrote: Tue Jun 08, 2021 10:33 am For example, if I'm not maxing out my 401k and Roth IRA, then I shouldn't be buying I Bonds from the Treasury Direct. It always makes more sense to be putting my bond allocation into a tax advantaged account over trying to buy I Bonds which must be in a taxable account, right?
I don’t think this is generally the case. Unless you expect to be in a much lower tax bracket in retirement, the tax advantages of 401k and IRA accounts may not be nearly large enough to compensates for the advantages of savings bonds relative to marketable bonds.
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by lakpr »

MindlessPorcupine wrote: Tue Jun 08, 2021 10:33 am For example, if I'm not maxing out my 401k and Roth IRA, then I shouldn't be buying I Bonds from the Treasury Direct. It always makes more sense to be putting my bond allocation into a tax advantaged account over trying to buy I Bonds which must be in a taxable account, right?
The way I read this -- you are taking the advice of "all bonds in 401k" a little too literally. You just need to determine what the best space for bonds is in your portfolio. OFTEN, that is indeed the tax-deferred account like 401k. But having the bonds in a taxable account, specially I bonds, is a perfectly reasonable alternative.

The much higher yield on the I bonds, coupled with the tax-deferral aspect within the taxable account, make it a darn strong argument for holding bonds in taxable and maxing out the tax-deferred with stocks.

Holding bonds in taxable accounts is normally discouraged because you are obligated to pay taxes on the interest on those bonds, whether realized or not, during your peak working years when you are likely to be in the highest tax brackets of your career -- and thus a larger percentage of the yield from the bonds is taken up by Uncle Sam. But with I bonds, you can choose to defer the interest until you actually redeem them, or up to 30 years from the date of issuance. Thus you get the tax-deferral aspect of the 401k type accounts. And of course, the higher yield (3.54%) than either an intermediate term bond fund (1.3% thereabouts now) or a long term bond fund (1.7% to 2.1% depending on LT treasury or LT corporate bonds).
Thesaints
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by Thesaints »

lakpr wrote: Tue Jun 08, 2021 2:04 pm
MindlessPorcupine wrote: Tue Jun 08, 2021 10:33 am For example, if I'm not maxing out my 401k and Roth IRA, then I shouldn't be buying I Bonds from the Treasury Direct. It always makes more sense to be putting my bond allocation into a tax advantaged account over trying to buy I Bonds which must be in a taxable account, right?
The way I read this -- you are taking the advice of "all bonds in 401k" a little too literally. You just need to determine what the best space for bonds is in your portfolio. OFTEN, that is indeed the tax-deferred account like 401k. But having the bonds in a taxable account, specially I bonds, is a perfectly reasonable alternative.

The much higher yield on the I bonds, coupled with the tax-deferral aspect within the taxable account, make it a darn strong argument for holding bonds in taxable and maxing out the tax-deferred with stocks.

Holding bonds in taxable accounts is normally discouraged because you are obligated to pay taxes on the interest on those bonds, whether realized or not, during your peak working years when you are likely to be in the highest tax brackets of your career -- and thus a larger percentage of the yield from the bonds is taken up by Uncle Sam. But with I bonds, you can choose to defer the interest until you actually redeem them, or up to 30 years from the date of issuance. Thus you get the tax-deferral aspect of the 401k type accounts. And of course, the higher yield (3.54%) than either an intermediate term bond fund (1.3% thereabouts now) or a long term bond fund (1.7% to 2.1% depending on LT treasury or LT corporate bonds).
True, but keep in mind that you probably want to load your Roth with stocks, not bonds. After 30 years there will likely be a lot more capital gains you want to shield from taxation.
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by Mel Lindauer »

A few of things to work consider:
1. I Bonds can expand or supplement one's retirement space for everyone, but they may be attractive for those whose contributions aren't deductible or who have a lousy plan with no match.
2. Other than the I Bond's 30 year maturity, there's no Required Minimum Distribution on I Bonds as there are with retirement plans.
3. There's no IRS penalty for I Bond withdrawals prior to age 59.5 as there can be with retirement plans.

Having said that, most investors should probably contribute to their retirement plans first, in order to get both the company match and the tax deduction.
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by Thesaints »

Mel Lindauer wrote: Tue Jun 08, 2021 2:33 pm A few of things to work consider:
1. I Bonds can expand or supplement one's retirement space for everyone, but they may be attractive for those whose contributions aren't deductible or who have a lousy plan with no match.
2. Other than the I Bond's 30 year maturity, there's no Required Minimum Distribution on I Bonds as there are with retirement plans.
3. There's no IRS penalty for I Bond withdrawals prior to age 59.5 as there can be with retirement plans.

Having said that, most investors should probably contribute to their retirement plans first, in order to get both the company match and the tax deduction.
Why not EE bonds too ? From the point of view of deferring taxes they are just as good as the Series I.
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by ivgrivchuck »

MindlessPorcupine wrote: Tue Jun 08, 2021 10:33 am For example, if I'm not maxing out my 401k and Roth IRA, then I shouldn't be buying I Bonds from the Treasury Direct. It always makes more sense to be putting my bond allocation into a tax advantaged account over trying to buy I Bonds which must be in a taxable account, right?
No. IRA gives you tax benefits. I-bonds gives you a higher rate. The correct answer depends on many factors and predictions.
37% VTI | 37% VXUS | 13% I-bonds | 13% EE-bonds
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by ivgrivchuck »

ivgrivchuck wrote: Tue Jun 08, 2021 4:39 pm
MindlessPorcupine wrote: Tue Jun 08, 2021 10:33 am For example, if I'm not maxing out my 401k and Roth IRA, then I shouldn't be buying I Bonds from the Treasury Direct. It always makes more sense to be putting my bond allocation into a tax advantaged account over trying to buy I Bonds which must be in a taxable account, right?
No. IRA gives you tax benefits. I-bonds gives you a higher rate. The correct answer depends on many factors and predictions.
For example, if you have a large IRA and the expected marginal retirement tax rate is close to your current marginal tax rate, this scenario clearly favors I-bonds.
37% VTI | 37% VXUS | 13% I-bonds | 13% EE-bonds
Thesaints
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by Thesaints »

Savings Bonds have the same tax benefits as non-deductible IRA's.
Still choosing whether to invest in Series I bonds, or in a 401k is not a well-defined dilemma. Which bonds in the 401k ? Also, Roth's are definitely not the place for bonds, unless we are talking of a few years time span.
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by lakpr »

Thesaints wrote: Tue Jun 08, 2021 4:33 pm Why not EE bonds too ? From the point of view of deferring taxes they are just as good as the Series I.
EE bonds, if redeemed earlier than the 20 year mark, yield only 0.1% plus 3 months penalty. So you really need to be committed to holding them the full 20 years.
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by Mel Lindauer »

lakpr wrote: Tue Jun 08, 2021 5:29 pm
Thesaints wrote: Tue Jun 08, 2021 4:33 pm Why not EE bonds too ? From the point of view of deferring taxes they are just as good as the Series I.
EE bonds, if redeemed earlier than the 20 year mark, yield only 0.1% plus 3 months penalty. So you really need to be committed to holding them the full 20 years.
True. EE Bonds double in 20 years, so they can be a great way to build your own annuity. Here's a link to a Forbes column I did on that strategy some time ago.

https://www.forbes.com/sites/theboglehe ... 197ec87ba3
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by Thesaints »

...assuming 3.5% will still be a palatable rate
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by Clever_Username »

As others indicated, if you're still in the situation where "have an emergency fund" is standard advice, converting your emergency fund to Series I Savings Bonds makes a lot of sense. After the year, treat them as part of said fund (or, if you're past the emergency fund phase, as part of your emergency plan), and it's like having an inflation-indexed savings account.
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by grabiner »

TIPS in a Roth IRA will likely outperform I-Bonds in a taxable account over a long term. I-Bonds yield zero, while TIPS yields are negative, but the gains in a Roth IRA will be tax-free, while the gains on the I-Bonds are subject to federal tax.

But this requires a long term. The 10-year TIPS yields -0.90%, so it will earn 9% less than inflation over 10 years. An I-Bond held for 10 years will earn an amount equal to inflation, but the inflation adjustment will be reduced by tax. If you are in a 22% bracket and inflation is 3%, then the inflation adjustment after 10 years will be 35% of the present value, so you will earn 6% less than inflation over 10 years. (You could use 30-year TIPS instead, which yield near zero, but you would then have a lot of interest-rate risk if you spend the money in 10 years.)

If you will retire in a lower tax bracket, TIPS in a 401(k) will still outperform I-Bonds over a moderate time horizon. That 9% loss above can be made up if you contribute $780 out of pocket to buy $1000 worth of TIPS, and get $880 back because you withdraw at a 12% marginal tax rate.

So that is the math. If you are maxing out your 401(k) (or the 401(k) has high fees which will eat up the tax advantage), I-Bonds in a taxable account are likely better than maxing out your Roth IRA for money to be spent within 10 years, even if you will qualify for penalty-free withdrawals from the Roth IRA.

The non-math depends on when you need the money. If you may spend the money before you can withdraw penalty-free from the IRA or 401(k), that is a reason to invest in something in your taxable account, and I-Bonds there may be a good choice.
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by mrsgoldilocks »

For me, I Bonds is my emergency funds so I don't think it's related to retirement account at all. They are 2 totally diff animals. i.e. money I put into retirement account has a penalty if I withdraw before certain age, but I Bonds can be served as my saving and it's redeemable after 12 months.
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by Escapevelocity »

grabiner wrote: Thu Jun 10, 2021 6:26 pm TIPS in a Roth IRA will likely outperform I-Bonds in a taxable account over a long term. I-Bonds yield zero, while TIPS yields are negative, but the gains in a Roth IRA will be tax-free, while the gains on the I-Bonds are subject to federal tax.
This post got me thinking. It seems fundamentally wrong/unfair that income taxes apply to the inflation adjustment from I-Bonds. My thought is that only the real return component of I-Bond interest should be taxed (currently this is zero). If the objective of I-Bonds is to allow savings to keep pace with inflation for the rank and file savers, then taxing those adjustments renders it a partial failure in that objective. This is not meant to be a political point. Just an observation about I-Bonds as a tool for remaining whole against inflation. I suppose this opens a bigger pandora's box about taxing inflation driven gains in general.
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by anon_investor »

Escapevelocity wrote: Thu Jun 10, 2021 9:23 pm
grabiner wrote: Thu Jun 10, 2021 6:26 pm TIPS in a Roth IRA will likely outperform I-Bonds in a taxable account over a long term. I-Bonds yield zero, while TIPS yields are negative, but the gains in a Roth IRA will be tax-free, while the gains on the I-Bonds are subject to federal tax.
This post got me thinking. It seems fundamentally wrong/unfair that income taxes apply to the inflation adjustment from I-Bonds. My thought is that only the real return component of I-Bond interest should be taxed (currently this is zero). If the objective of I-Bonds is to allow savings to keep pace with inflation for the rank and file savers, then taxing those adjustments renders it a partial failure in that objective. This is not meant to be a political point. Just an observation about I-Bonds as a tool for remaining whole against inflation. I suppose this opens a bigger pandora's box about taxing inflation driven gains in general.
When I Bonds were first introduced, the fixed rate was high enough that after taxes people were still getting a positive real yield. Some older BHs have 3%+ fixed rate I Bonds.
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by Mel Lindauer »

grabiner wrote: Thu Jun 10, 2021 6:26 pm TIPS in a Roth IRA will likely outperform I-Bonds in a taxable account over a long term. I-Bonds yield zero, while TIPS yields are negative, but the gains in a Roth IRA will be tax-free, while the gains on the I-Bonds are subject to federal tax.

But this requires a long term. The 10-year TIPS yields -0.90%, so it will earn 9% less than inflation over 10 years. An I-Bond held for 10 years will earn an amount equal to inflation, but the inflation adjustment will be reduced by tax. If you are in a 22% bracket and inflation is 3%, then the inflation adjustment after 10 years will be 35% of the present value, so you will earn 6% less than inflation over 10 years. (You could use 30-year TIPS instead, which yield near zero, but you would then have a lot of interest-rate risk if you spend the money in 10 years.)

If you will retire in a lower tax bracket, TIPS in a 401(k) will still outperform I-Bonds over a moderate time horizon. That 9% loss above can be made up if you contribute $780 out of pocket to buy $1000 worth of TIPS, and get $880 back because you withdraw at a 12% marginal tax rate.

So that is the math. If you are maxing out your 401(k) (or the 401(k) has high fees which will eat up the tax advantage), I-Bonds in a taxable account are likely better than maxing out your Roth IRA for money to be spent within 10 years, even if you will qualify for penalty-free withdrawals from the Roth IRA.

The non-math depends on when you need the money. If you may spend the money before you can withdraw penalty-free from the IRA or 401(k), that is a reason to invest in something in your taxable account, and I-Bonds there may be a good choice.
Of course, it should be pointed out that TIPS cannot outperform I Bonds that are used for qualifying educational expenses (assuming the owner meets the income limits), since that interest is tax-free.
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by Escapevelocity »

anon_investor wrote: Thu Jun 10, 2021 9:27 pm
Escapevelocity wrote: Thu Jun 10, 2021 9:23 pm
grabiner wrote: Thu Jun 10, 2021 6:26 pm TIPS in a Roth IRA will likely outperform I-Bonds in a taxable account over a long term. I-Bonds yield zero, while TIPS yields are negative, but the gains in a Roth IRA will be tax-free, while the gains on the I-Bonds are subject to federal tax.
This post got me thinking. It seems fundamentally wrong/unfair that income taxes apply to the inflation adjustment from I-Bonds. My thought is that only the real return component of I-Bond interest should be taxed (currently this is zero). If the objective of I-Bonds is to allow savings to keep pace with inflation for the rank and file savers, then taxing those adjustments renders it a partial failure in that objective. This is not meant to be a political point. Just an observation about I-Bonds as a tool for remaining whole against inflation. I suppose this opens a bigger pandora's box about taxing inflation driven gains in general.
When I Bonds were first introduced, the fixed rate was high enough that after taxes people were still getting a positive real yield. Some older BHs have 3%+ fixed rate I Bonds.
The Treasury needs to set up a way to hold I Bonds in Roth IRAs
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by anon_investor »

Escapevelocity wrote: Thu Jun 10, 2021 10:03 pm
anon_investor wrote: Thu Jun 10, 2021 9:27 pm
Escapevelocity wrote: Thu Jun 10, 2021 9:23 pm
grabiner wrote: Thu Jun 10, 2021 6:26 pm TIPS in a Roth IRA will likely outperform I-Bonds in a taxable account over a long term. I-Bonds yield zero, while TIPS yields are negative, but the gains in a Roth IRA will be tax-free, while the gains on the I-Bonds are subject to federal tax.
This post got me thinking. It seems fundamentally wrong/unfair that income taxes apply to the inflation adjustment from I-Bonds. My thought is that only the real return component of I-Bond interest should be taxed (currently this is zero). If the objective of I-Bonds is to allow savings to keep pace with inflation for the rank and file savers, then taxing those adjustments renders it a partial failure in that objective. This is not meant to be a political point. Just an observation about I-Bonds as a tool for remaining whole against inflation. I suppose this opens a bigger pandora's box about taxing inflation driven gains in general.
When I Bonds were first introduced, the fixed rate was high enough that after taxes people were still getting a positive real yield. Some older BHs have 3%+ fixed rate I Bonds.
The Treasury needs to set up a way to hold I Bonds in Roth IRAs
Why? Isn't it better to have equities in Roth?
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by Escapevelocity »

anon_investor wrote: Thu Jun 10, 2021 10:06 pm
Escapevelocity wrote: Thu Jun 10, 2021 10:03 pm
anon_investor wrote: Thu Jun 10, 2021 9:27 pm
Escapevelocity wrote: Thu Jun 10, 2021 9:23 pm
grabiner wrote: Thu Jun 10, 2021 6:26 pm TIPS in a Roth IRA will likely outperform I-Bonds in a taxable account over a long term. I-Bonds yield zero, while TIPS yields are negative, but the gains in a Roth IRA will be tax-free, while the gains on the I-Bonds are subject to federal tax.
This post got me thinking. It seems fundamentally wrong/unfair that income taxes apply to the inflation adjustment from I-Bonds. My thought is that only the real return component of I-Bond interest should be taxed (currently this is zero). If the objective of I-Bonds is to allow savings to keep pace with inflation for the rank and file savers, then taxing those adjustments renders it a partial failure in that objective. This is not meant to be a political point. Just an observation about I-Bonds as a tool for remaining whole against inflation. I suppose this opens a bigger pandora's box about taxing inflation driven gains in general.
When I Bonds were first introduced, the fixed rate was high enough that after taxes people were still getting a positive real yield. Some older BHs have 3%+ fixed rate I Bonds.
The Treasury needs to set up a way to hold I Bonds in Roth IRAs
Why? Isn't it better to have equities in Roth?
I meant as a slice of an overall allocation not the entire account.
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by Gaston »

I’ll admit I don’t understand the interest in ibonds. Maybe I need to re-read the purchase limits, which I thought were $10,000 per account per year, or something close to that.

If one has a total portfolio (equity + bonds) of $50,000, then yes, ibonds can play a meaningful role. But if one has a larger portfolio, ibonds just don’t move the needle.

Also, ibonds seem inconsistent with the Boglehead principle of simplicity, if larger purchases require setting up and monitoring multiple accounts, or if one must overpay taxes in order to get a year-end tax refund for ibond purchases.

What am I missing?
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by z3r0c00l »

Gaston wrote: Fri Jun 11, 2021 7:05 am I’ll admit I don’t understand the interest in ibonds. Maybe I need to re-read the purchase limits, which I thought were $10,000 per account per year, or something close to that.

If one has a total portfolio (equity + bonds) of $50,000, then yes, ibonds can play a meaningful role. But if one has a larger portfolio, ibonds just don’t move the needle.

Also, ibonds seem inconsistent with the Boglehead principle of simplicity, if larger purchases require setting up and monitoring multiple accounts, or if one must overpay taxes in order to get a year-end tax refund for ibond purchases.

What am I missing?
It's $10,000 per year simply per SS number, or $15,000 per year if you want the extra hassle of tax refunds (I don't). So a couple could easily buy $20,000 per year for a decade or more. $200,000 in I bonds is plenty for a couple with $1 million invested. If you have 3, 4, $5 million invested then you are wealthy and beat inflation by virtue of having a lot of money.

As a single person mid-career, I have already accumulated $100K in I bonds and that is enough for my needs. They are guaranteed to keep pace with inflation with zero risk to principal and state/city tax exempt. That kind of thing sounds boring until suddenly it isn't. This year it isn't boring anymore and people are scrambling to prepare for inflation.

Re. the simplicity question, opening an account is super easy and I have not had a single problem with it since. Just don't press the back arrow on the browser (which you normally can't do with secure web pages anyway). Once a year I buy a new $10,000 bond and occasionally check the balance on older bonds to update the spreadsheet. It takes maybe 30 minutes a year.
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by Gaston »

Thank you z3r0c001.
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Re: I bonds are only worth it with maxed retirement accounts right?

Post by AnEngineer »

Gaston wrote: Fri Jun 11, 2021 7:05 am If one has a total portfolio (equity + bonds) of $50,000, then yes, ibonds can play a meaningful role. But if one has a larger portfolio, ibonds just don’t move the needle.
You're right that you can't quickly rebalance into ibonds, but if you're looking at new investments each year, the limit is much less of a concern.
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