Noobvestor wrote: ↑Mon Nov 20, 2023 11:43 pm
OH, sorry, I should have been more specific (guilty as usual of using 'bonds' as a casual shorthand for 'bond funds'). I'd be swapping EE bonds for Treasuries held in a Treasury bond fund. I also hold most of my investments in taxable (business windfalls years back made it inevitable). From the start, part of the reason for going for EE and I bonds was expanding effective tax-advantaged space (any sold EE bonds, for the sake of simplicity, would be traded for Treasuries held in a fund in a taxable account -- so selling EEs reduces effective tax-advantaged space, in a sense). But I don't know if that 'effective expansion' is worth much, or really: how to value that effectively.
Okay, so the question is really more something like: "Are EE & I bonds a bad investment choice or does tax deferral make them an okay choice?".
The newest EE bonds at least have a better short term return, so may not be the worst of them. The worst would probably be those bought in 2021 or 2022 with a 0.1% short term rate. Those have 18-19 years to maturity.
You might compare those by assuming you could get something like 4.75-4.95% nominal over the next 18 years (based on Treasury yield curve and STRIPS quotes) or alternatively get about 3.9% tax deferred over that same time.
In the 12% bracket, using a taxable account and 4.75% return, the after tax return would be (0.88)(4.75%)=4.18%, so you can see that even at a 0% tax rate at maturity you would beat EE bonds.
In the 22% bracket, it would be a 3.7% return, so there is some chance the EEs could come out ahead. A 3.7% return on $10K over 18 years would give you $19,232. From that you can see what tax bracket you would need to be in for the EE to be approximately equivalent.
$10K at 3.9% for 18 years for the EE, would give you $19,910 before tax. So if the tax was $678 ($19,910-$19,232) the EE would equal the taxable investment. Your gain is $9910, so the break-even tax rate is about 6.85% (678/9910). Probably an unlikely tax bracket to anticipate, but you'd not lose that much at 12%. In that bracket, tax would be $1189, so your after tax total would be $18,721, $500 less than the taxable alternative.
You could repeat this sort of analysis for other terms and using your actual tax bracket.
A factor that could tilt things a little more toward the EEs would be if you anticipate the tax brackets reverting to 15% and 25%. That's make 4.75% equivalent to 3.56% after-tax and leave you with $18,778 and a break-even tax rate of 11.4%. There could certainly be an agreement to allow higher tax rates to revert, while keeping 12%, making this about as close to a toss-up as it could be.
I'd say that for one in the 22% bracket, who might be in a lower bracket when the EEs are redeemed and with only a taxable account to hold the EE's replacement, keeping or redeeming one with 18 years looks to be pretty close to a toss-up.
Another thing that could tilt one more toward the EEs would be if you thought you might move into a higher tax bracket (due to income, rather than rates reverting) during the term of the EEs, even though you might be in a lower bracket when actually redeeming. Maybe it would even be all that interest from the taxable treasuries that would push you into a higher tax bracket