I Bonds are a screaming buy - Tipswatch

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Day9
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I Bonds are a screaming buy - Tipswatch

Post by Day9 »

https://seekingalpha.com/article/433052 ... ime-to-buy

I Bonds current real yield is 0.2%. TIPS have negative real yields, including the 30 year which is currently -0.2%. "The I Bond is clearly the best very safe inflation-protected investment in the world." This is one of the advantages of the small-time investor who doesn't turn their nose to the $10,000 limit.

"Here is how the I Bond and TIPS real yields have compared since the I Bond's last rate reset, in November 2019, showing the remarkable drop in TIPS yields as the I Bond fixed rate remained stable":
Image

Is anybody buying these 0.2% real yield I Bonds?
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klaus14
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Re: I Bonds are a screaming buy - Tipswatch

Post by klaus14 »

I plan to buy it before rate change.
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fwellimort
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Re: I Bonds are a screaming buy - Tipswatch

Post by fwellimort »

Of course. And EE Bonds are the greatest 20 year bond steals of the century at this point.
Guaranteed 3.5% interest rate that is tax deferred and tax exempt from state/local.

The only issue is the $10k limit on both. And unlike I Bonds, EE Bonds don't have the advantage of liquidity.

That said, I expect the global stock market to outperform both bonds long term. So only my emergency fund is being translated to I Bonds right now.
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Re: I Bonds are a screaming buy - Tipswatch

Post by tipswatcher »

Thank you @Day9 for the call-out, I appreciate it!

I agree that if you have a 20-year time horizon and you can *absolutely* hold for 20 years, EE Bonds are an amazing investment in March 2020. You'll get about 3.5% yield, tax-deferred, when you double your money at exactly 20 years. Until then, you earn 0.1%. After that, you also earn 0.1%, so hold an EE Bond for exactly 20 years, then redeem.

The Treasury says it is about to begin issuing 20-year Treasurys, which today would yield about 0.87%. An EE Bond has a yield advantage of 263 basis points, tax-deferred! Would the Treasury consider lengthening the 20-year doubling to a longer term, say 25 years, at the May 1 reset? I am thinking that won't happen, but it could happen. So if you want to invest in EE Bonds, do it in April, just to be safe.

Same thing with I Bonds, which currently have a real yield of 0.2%, but that is highly likely to drop to 0.0% on May 1. So invest in April. But even at 0.0%, the I Bond has a higher after-inflation yield than any TIPS of any term. It's an amazing fact that the nominal 10-year Treasury today is yielding 0.54%, only 34 basis points higher than the 0.20% real return of an I Bond.
TIPS: Perfect investment for imperfect times?
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Watty
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Re: I Bonds are a screaming buy - Tipswatch

Post by Watty »

A big problem with I Bonds is that you can only own them in a taxable account so after you pay the federal taxes on the inflation adjustment you will likely lose purchasing power to inflation.

They may still be useful for some special situations like an emergency fund or education but I am not very excited about them.

To me at best they may be the least bad choice.
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Re: I Bonds are a screaming buy - Tipswatch

Post by Jack FFR1846 »

I love iBonds. $5k federal refund in paper only, however.
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leftcoaster
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Re: I Bonds are a screaming buy - Tipswatch

Post by leftcoaster »

Reminder that you can actually buy 20k - 10k personal and 10k in a revocable living trust. For a married couple that means 30k. And you can have all reissued to the trust.

Add to that the 5k from an IRS refund and you can do 65k / year.
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Re: I Bonds are a screaming buy - Tipswatch

Post by Dottie57 »

leftcoaster wrote: Tue Mar 10, 2020 9:25 am Reminder that you can actually buy 20k - 10k personal and 10k in a revocable living trust. For a married couple that means 30k. And you can have all reissued to the trust.

Add to that the 5k from an IRS refund and you can do 65k / year.
How did you get 65k?

Mary and Tom are married and each have their own trusts so 10k in each of their names is 20k . The each of their trusts can purchase 10k or another 20k making it 40k. Add 5k as a refund from taxes - presumably you overpay in 4th quarter. That is 45k. Where does the additional 20k come from?
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anon_investor
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Re: I Bonds are a screaming buy - Tipswatch

Post by anon_investor »

Dottie57 wrote: Tue Mar 10, 2020 9:34 am
leftcoaster wrote: Tue Mar 10, 2020 9:25 am Reminder that you can actually buy 20k - 10k personal and 10k in a revocable living trust. For a married couple that means 30k. And you can have all reissued to the trust.

Add to that the 5k from an IRS refund and you can do 65k / year.
How did you get 65k?

Mary and Tom are married and each have their own trusts so 10k in each of their names is 20k . The each of their trusts can purchase 10k or another 20k making it 40k. Add 5k as a refund from taxes - presumably you overpay in 4th quarter. That is 45k. Where does the additional 20k come from?
2 kids?
leftcoaster
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Re: I Bonds are a screaming buy - Tipswatch

Post by leftcoaster »

Dottie57 wrote: Tue Mar 10, 2020 9:34 am
leftcoaster wrote: Tue Mar 10, 2020 9:25 am Reminder that you can actually buy 20k - 10k personal and 10k in a revocable living trust. For a married couple that means 30k. And you can have all reissued to the trust.

Add to that the 5k from an IRS refund and you can do 65k / year.
How did you get 65k?

Mary and Tom are married and each have their own trusts so 10k in each of their names is 20k . The each of their trusts can purchase 10k or another 20k making it 40k. Add 5k as a refund from taxes - presumably you overpay in 4th quarter. That is 45k. Where does the additional 20k come from?
I assume one trust and buy both I and EE bonds.
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Re: I Bonds are a screaming buy - Tipswatch

Post by whodidntante »

If you really, really need more bonds in a taxable account I guess 0.2% real is better than TIPS if you can accept the 1-year lockup and the 3-month interest penalty if sold before the 5 year mark. Although you can currently expect to beat that with nominal direct CDs if you can accept the risk of inflation spiking.

But I have a hard time calling a 0.2% real return that will take a punishing tax haircut (for me at least) a screaming buy. It's more like a sleepy meh. It's clearly a better deal than TIPS within a taxable account and let's leave it at that.
aristotelian
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Re: I Bonds are a screaming buy - Tipswatch

Post by aristotelian »

I had the same thought and bought today. I still have $1K to go and will try to buy before the end of the month.
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Re: I Bonds are a screaming buy - Tipswatch

Post by tipswatcher »

A big problem with I Bonds is that you can only own them in a taxable account so after you pay the federal taxes on the inflation adjustment you will likely lose purchasing power to inflation.
My investing goal is to have "some" allocation to inflation protection (currently about 15% of my portfolio in I Bonds and individual TIPS). I have two TIPS maturing this year -- one in January and one in April -- and I can't see reinvesting that money in TIPS right now. So I Bonds are an excellent alternative. One strong point of I Bonds is that you are free to redeem them anytime after 1 year (small penalty) or 5 years (no penalty). So, in retirement, you can choose to redeem in a year when your tax liability will be smaller.

I Bonds turn out to be very similar to a traditional, non-deductible IRA. Earnings are tax-deferred, possibly for 30 years.

One thing about that three-month interest penalty: If you want to redeem before 5 years, you can watch for a time when the composite return is very low, and redeem after at least three months of that low return. The penalty will be very low on a $10,000 investment. Personally, I wait 5 years, and I rarely redeem an I Bond unless I can step up from a 0.0% fixed rate to something closer to 0.5%.
TIPS: Perfect investment for imperfect times?
Pikel
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Re: I Bonds are a screaming buy - Tipswatch

Post by Pikel »

tipswatcher wrote: Tue Mar 10, 2020 9:14 am An EE Bond has a yield advantage of 263 basis points, tax-deferred! Would the Treasury consider lengthening the 20-year doubling to a longer term, say 25 years, at the May 1 reset? I am thinking that won't happen, but it could happen.
I really hope not. Fed funds rate was 0 from 2009-2015 and they didn't change it then. The current yield curve is really weird though.

It also seems like an especially weird time to go after the 'little guy.'
pop77
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Re: I Bonds are a screaming buy - Tipswatch

Post by pop77 »

How does I Bond compare with pre-paying mortgage? Is there a cut off rate in mortgage that makes it a better choice. I am struggling with that decision now..
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ray.james
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Re: I Bonds are a screaming buy - Tipswatch

Post by ray.james »

Hello tipswatcher,

Just want to say love your site and thank you for sharing your awesome work!

------------------
My strategy - I use I bonds for my 1 year emergency fund. They may evolve into part of my fixed income as I age.
Ibonds at 0.5 fixed last year were just :sharebeer :sharebeer . We haven't had those for 10 years.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939
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Re: I Bonds are a screaming buy - Tipswatch

Post by watchnerd »

Day9 wrote: Tue Mar 10, 2020 12:31 am This is one of the advantages of the small-time investor who doesn't turn their nose to the $10,000 limit.

[snip]

Is anybody buying these 0.2% real yield I Bonds?
No, I'm not.

Because of the $10k individual / $20k couple limit.

It doesn't move my bond allocation needle.

I can't wait 30+ years to get the inflation protection I'd like to get today.
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RandomWord
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Re: I Bonds are a screaming buy - Tipswatch

Post by RandomWord »

Can someone answer a few basic questions about these for me?

-Who can buy these? Is it only for Americans?
-If I buy them, am I allowed to resell these to someone else (pretty sure the answer is no)?
-If I sell them back to the government before they mature, how much do I get? And what are the tax consequences of that?
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Re: I Bonds are a screaming buy - Tipswatch

Post by ray.james »

RandomWord wrote: Tue Mar 10, 2020 11:32 am Can someone answer a few basic questions about these for me?

-Who can buy these? Is it only for Americans?
-If I buy them, am I allowed to resell these to someone else (pretty sure the answer is no)?
-If I sell them back to the government before they mature, how much do I get? And what are the tax consequences of that?
https://www.bogleheads.org/wiki/I_savings_bonds
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939
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anon_investor
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Re: I Bonds are a screaming buy - Tipswatch

Post by anon_investor »

I Bonds only make sense for me as part of my emergency fund. People often forget that if inflation is negative, which has happened in the recent past, your 0.2% fixed interest I Bonds may earn 0% during that period... I plan to add $10k of I Bonds before the rate change but only to serve as a portion of my emergency fund.
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Re: I Bonds are a screaming buy - Tipswatch

Post by rascott »

whodidntante wrote: Tue Mar 10, 2020 9:53 am If you really, really need more bonds in a taxable account I guess 0.2% real is better than TIPS if you can accept the 1-year lockup and the 3-month interest penalty if sold before the 5 year mark. Although you can currently expect to beat that with nominal direct CDs if you can accept the risk of inflation spiking.

But I have a hard time calling a 0.2% real return that will take a punishing tax haircut (for me at least) a screaming buy. It's more like a sleepy meh. It's clearly a better deal than TIPS within a taxable account and let's leave it at that.


Had to LOL at "screaming buy" to describe a US savings bond.

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Angst
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Re: I Bonds are a screaming buy - Tipswatch

Post by Angst »

Anyone who's building a small Liability Matching Portfolio (LMP) of TIPS to complement their SS and other "guaranteed" income in retirement, will want to consider using the 0.2% I-Bonds for covering a rung in that LMP. And those 0.5% I-Bonds from 2019 and 2018 were also great TIPS substitutes for rungs on an LMP. Yes, yes... for those of us who can't be bothered with the tiny $10k annual limitations, etc, we get it! Lucky you. :) Lucky us though for being in a lower tax bracket in retirement, I guess. :shock:
lws
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Re: I Bonds are a screaming buy - Tipswatch

Post by lws »

Yes. I buy 10K each year.
Faith20879
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Re: I Bonds are a screaming buy - Tipswatch

Post by Faith20879 »

Angst wrote: Tue Mar 10, 2020 12:06 pm Anyone who's building a small Liability Matching Portfolio (LMP) of TIPS to complement their SS and other "guaranteed" income in retirement,
Yep that's us, 25k every year even during the years when it wasn't screaming.

However we've stopping buying EE bonds because of our age - long in the tooth and can't wait for another 20 years.
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Re: I Bonds are a screaming buy - Tipswatch

Post by #Cruncher »

RandomWord wrote: Tue Mar 10, 2020 11:32 am-If I sell them back to the government before they mature, how much do I get? And what are the tax consequences of that?
Perhaps this can best be explained with an illustration. The last time I Bonds were issued with a 0.20% fixed rate was November 2013 through April 2014. If you had bought a $10,000 bond 11/2013, the Treasury would redeem it for $11,252 in May 2020. As this web page shows, the value goes up month by month except for the six months from 5/1/2015 to 11/1/2015 when it stayed the same. The way these monthly values are calculated is complicated and is explained in the Wiki's I Bonds Rates & Terms.

But the approximate minimum value of an I Bond can be calculated more simply as follows:
  • 13 = # of six month periods from 11/1/2013 to 5/1/2020
  • 10,131 = real value 5/1/2020 = 10000 * (1 + 0.2% / 2) ^ 13
  • 232.773 = CPI March 2013 (CPI source: CUUR0000SA0 from BLS Top Picks.)
  • 256.759 = CPI September 2019
  • 11,175 = nominal value 5/1/2020 = 10131 * (256.759 / 232.773)
The $11,252 actual value differs from the $11,175 estimated value for three reasons. The first two are minor and can be either beneficial or detrimental; but the third can be significant and is always beneficial.
  1. The six month inflation rates and composite rates are rounded to four decimal places.
  2. The monthly value of a $25 I Bond is rounded to the nearest penny and larger I Bonds are scalings of this. E.g., each monthly value of a $10,000 I Bond with be 400 times the value of a $25 bond.
  3. The composite rate has a floor of 0%. For the six months 5/1/2015 to 11/1/2015 it would have been -1.40% without this floor. Therefore the floor increased the I Bonds value 0.7% over the six months. This accounts for almost all of the difference between the estimated $11,175 and the actual $11,252.
The $1,252 increase in value would be subject to federal income tax as ordinary income, but would be exempt from state or local income taxes.
alluringreality
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Re: I Bonds are a screaming buy - Tipswatch

Post by alluringreality »

pop77 wrote: Tue Mar 10, 2020 10:42 am How does I Bond compare with pre-paying mortgage? Is there a cut off rate in mortgage that makes it a better choice. I am struggling with that decision now..
The rate I owe on my house is greater than recent returns after taxes from I Bonds, high yield savings, or CDs. The overall bond market seems to be betting heavily on continued low inflation at this time, and the Fed target inflation is likely lower than most mortgages, so generally I Bonds wouldn't typically be expected to return more than a mortgage at this time. Depending on future taxes, EE bonds may exceed what I owe on my house, yet the 20 year holding period to double EE bonds introduces some liquidity considerations in comparison to I Bonds. It probably makes sense to pay down a mortgage for most people.
Targets: 15% I Bonds, 15% EE Bonds, 45% US Stock (Mid & Small Tilt), 25% Ex-US Stock (Small Tilt)
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Re: I Bonds are a screaming buy - Tipswatch

Post by aceoperations »

I've been buying iBonds for the last 6 years to build up my emergency fund, and now that I have a year's worth of expenses saved up, I am going to buy stocks/bonds according to my AA. Although I do consider iBonds as part of my fixed income AA, these current rates are unappealing to continue buying anymore. Maybe that will change in the future...
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Re: I Bonds are a screaming buy - Tipswatch

Post by alluringreality »

aceoperations wrote: Tue Mar 10, 2020 2:11 pm I've been buying iBonds for the last 6 years to build up my emergency fund, and now that I have a year's worth of expenses saved up, I am going to buy stocks/bonds according to my AA. Although I do consider iBonds as part of my fixed income AA, these current rates are unappealing to continue buying anymore. Maybe that will change in the future...
I'm just getting started buying I Bonds, 2019 was my first year. Compared to other limited-term bonds that I'd consider using for my emergency funds, I Bonds may still offer comparable rates. In my opinion all bonds purchased at this time might offer little in the way of returns going forward. The current I Bond fixed rate is roughly similar to the past six years, although the recent run makes marketable bonds look like a better buy as they floundered through 2015-2018. One advantage of I Bonds is that they can be sold after the first year if higher rates happen in the future. EE bonds look like a decent bet to me if the current trends continue, but of course they could also be a bad option in higher than average inflation, so I'm planning on buying half I Bonds and half EE bonds yearly until I hit my target allocations.
Last edited by alluringreality on Tue Mar 10, 2020 2:38 pm, edited 1 time in total.
Targets: 15% I Bonds, 15% EE Bonds, 45% US Stock (Mid & Small Tilt), 25% Ex-US Stock (Small Tilt)
Pikel
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Re: I Bonds are a screaming buy - Tipswatch

Post by Pikel »

I want to mention that in the current environment it is unlikely that CD's are beating I-bonds.

Two big reasons -

1) CD's are subjected to annual tax on interest, which is a compounding drag
2) I-bonds are tax deferred, and if you retire within 30 years your tax rate at withdrawal will be a lot less than it is today.

I understand there is nothing exciting about 2.2% expected returns, but if your current federal & state tax rate is in the low 30s you would need a CD paying closer to 3% to have an expected return equal to an I bond. Before the mess we are in today started, there were a couple CUs paying around that on 5 year CDs.

Lastly, if conditions change and CD's are paying better a few years from now, it is painless to move I-bonds into CDs.
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Re: I Bonds are a screaming buy - Tipswatch

Post by Angst »

alluringreality wrote: Tue Mar 10, 2020 2:24 pmEE bonds look like a decent bet to me if the current trends continue, but of course they could also be a bad option in higher than average inflation, so I'm planning on buying half I Bonds and half EE bonds yearly until I hit my target allocations.
I've been lucky over the last decade that I've been buying EE Bonds. At times I had to wonder if I would have to bail on some of them, but the gods have been kind. Nonetheless, because they are essentially zero coupon bonds without any accrued value until maturity, anyone buying EE Bonds probably ought to reconsider their purchases annually based on the prevailing rates and trends. From an old post, I find the following chart to be helpful for putting things in perspective as the years pass by:

Code: Select all

Year  YTM   Yrs left
1     3.53%    20
2     3.72%    19
3     3.93%    18
4     4.16%    17
5     4.43%    16
6     4.73%    15
7     5.08%    14
8     5.48%    13
9     5.95%    12
10    6.50%    11
11    7.18%    10
12    8.01%     9
13    9.05%     8
14   10.41%     7
15   12.25%     6
16   14.87%     5
17   18.92%     4
18   25.99%     3
19   42.42%     2
20  100.00%     1
alluringreality
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Re: I Bonds are a screaming buy - Tipswatch

Post by alluringreality »

Angst wrote: Tue Mar 10, 2020 3:24 pm I find the following chart to be helpful for putting things in perspective
That's an interesting perspective that I hadn't considered, thanks.
Targets: 15% I Bonds, 15% EE Bonds, 45% US Stock (Mid & Small Tilt), 25% Ex-US Stock (Small Tilt)
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Re: I Bonds are a screaming buy - Tipswatch

Post by Ice-9 »

#Cruncher wrote: Tue Mar 10, 2020 1:35 pm The monthly value of a $25 I Bond is rounded to the nearest penny and larger I Bonds are scalings of this. E.g., each monthly value of a $10,000 I Bond with be 400 times the value of a $25 bond.
This is off the topic of the original post, but thank you #Cruncher for solving one of my biggest mysteries about I-Bonds with this tidbit.

In the mid-2000s, I converted several paper I-bonds to Treasury Direct. Then I began making small purchases online towards an upper-tier of an emergency fund all the way to today. Treasury Direct separates the two types of I-Bonds into two accounts under the same login, with the former being called "Converted Bonds" on the website.

I noticed early on that all of my converted bonds were always full dollar amounts with no cents, but the online purchases always had cents. I hypothesized that maybe this had something to do with the "Converted Bonds" account and different rules for the paper bonds that they originally were. But now that you've explained the above, I realize it's the amounts of each bond. All of my converted bonds are either $5k or $10k, but the largest of my online purchased bonds is $2500. So, thanks for clearing that up!
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Re: I Bonds are a screaming buy - Tipswatch

Post by Phineas J. Whoopee »

Watty wrote: Tue Mar 10, 2020 9:22 am A big problem with I Bonds is that you can only own them in a taxable account so after you pay the federal taxes on the inflation adjustment you will likely lose purchasing power to inflation.

They may still be useful for some special situations like an emergency fund or education but I am not very excited about them.

To me at best they may be the least bad choice.
To add, not to argue, all taxable investments are treated the same way. Series I Savings Bonds are not disadvantaged versus other securities due to that.

They are advantaged in that the interest is tax deferred for up to thirty years, and it may not be taxable at all if the proceeds are used for the right kind of education expenses.

PJW
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Watty
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Post by Watty »

Phineas J. Whoopee wrote: Tue Mar 10, 2020 5:03 pm
Watty wrote: Tue Mar 10, 2020 9:22 am A big problem with I Bonds is that you can only own them in a taxable account so after you pay the federal taxes on the inflation adjustment you will likely lose purchasing power to inflation.

They may still be useful for some special situations like an emergency fund or education but I am not very excited about them.

To me at best they may be the least bad choice.
To add, not to argue, all taxable investments are treated the same way. Series I Savings Bonds are not disadvantaged versus other securities due to that.

They are advantaged in that the interest is tax deferred for up to thirty years, and it may not be taxable at all if the proceeds are used for the right kind of education expenses.

PJW
Agreed, one other thing people need to be aware of is that savings bonds are one of the few investments that do not go to your estate at a stepped up cost basis.
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Re: I Bonds are a screaming buy - Tipswatch

Post by RandomWord »

#Cruncher wrote: Tue Mar 10, 2020 1:35 pm
RandomWord wrote: Tue Mar 10, 2020 11:32 am-If I sell them back to the government before they mature, how much do I get? And what are the tax consequences of that?
Perhaps this can best be explained with an illustration. The last time I Bonds were issued with a 0.20% fixed rate was November 2013 through April 2014. If you had bought a $10,000 bond 11/2013, the Treasury would redeem it for $11,252 in May 2020. As this web page shows, the value goes up month by month except for the six months from 5/1/2015 to 11/1/2015 when it stayed the same. The way these monthly values are calculated is complicated and is explained in the Wiki's I Bonds Rates & Terms.

But the approximate minimum value of an I Bond can be calculated more simply as follows:
  • 13 = # of six month periods from 11/1/2013 to 5/1/2020
  • 10,131 = real value 5/1/2020 = 10000 * (1 + 0.2% / 2) ^ 13
  • 232.773 = CPI March 2013 (CPI source: CUUR0000SA0 from BLS Top Picks.)
  • 256.759 = CPI September 2019
  • 11,175 = nominal value 5/1/2020 = 10131 * (256.759 / 232.773)
The $11,252 actual value differs from the $11,175 estimated value for three reasons. The first two are minor and can be either beneficial or detrimental; but the third can be significant and is always beneficial.
  1. The six month inflation rates and composite rates are rounded to four decimal places.
  2. The monthly value of a $25 I Bond is rounded to the nearest penny and larger I Bonds are scalings of this. E.g., each monthly value of a $10,000 I Bond with be 400 times the value of a $25 bond.
  3. The composite rate has a floor of 0%. For the six months 5/1/2015 to 11/1/2015 it would have been -1.40% without this floor. Therefore the floor increased the I Bonds value 0.7% over the six months. This accounts for almost all of the difference between the estimated $11,175 and the actual $11,252.
The $1,252 increase in value would be subject to federal income tax as ordinary income, but would be exempt from state or local income taxes.
Thanks, #cruncher! You certainly live up to that name!

... but I think you've overestimated me. I was actually wondering something a lot more basic. Is the value of redeeming these bonds based on compound interest for however long I've had it? Or does it pay a coupon regularly, and then get redeemed for its original face value? Sounds like it's the former?
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Phineas J. Whoopee
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Re: I Bonds are a screaming buy - Tipswatch

Post by Phineas J. Whoopee »

Watty wrote: Tue Mar 10, 2020 5:27 pm
Phineas J. Whoopee wrote: Tue Mar 10, 2020 5:03 pm
Watty wrote: Tue Mar 10, 2020 9:22 am A big problem with I Bonds is that you can only own them in a taxable account so after you pay the federal taxes on the inflation adjustment you will likely lose purchasing power to inflation.

They may still be useful for some special situations like an emergency fund or education but I am not very excited about them.

To me at best they may be the least bad choice.
To add, not to argue, all taxable investments are treated the same way. Series I Savings Bonds are not disadvantaged versus other securities due to that.

They are advantaged in that the interest is tax deferred for up to thirty years, and it may not be taxable at all if the proceeds are used for the right kind of education expenses.

PJW
Agreed, one other thing people need to be aware of is that savings bonds are one of the few investments that do not go to your estate at a stepped up cost basis.
Also agreed.

PJW
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Re: I Bonds are a screaming buy - Tipswatch

Post by jacoavlu »

the deferred tax on I bond interest I see as a big benefit. In a high tax bracket, the common recommendation would be to put fixed income allocation into 401k. To avoid bond interest at marginal tax rates. Buying i bonds frees up more space in the 401k for equities, where there will be no tax drag.
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Re: I Bonds are a screaming buy - Tipswatch

Post by Noobvestor »

Watty wrote: Tue Mar 10, 2020 9:22 am A big problem with I Bonds is that you can only own them in a taxable account so after you pay the federal taxes on the inflation adjustment you will likely lose purchasing power to inflation.

They may still be useful for some special situations like an emergency fund or education but I am not very excited about them.

To me at best they may be the least bad choice.
Just to clarify for anyone considering: this is only an issue if you can fit all of your investments into 401ks, Roths, IRAs, etc... for anyone who is already stuck investing money in taxable accounts, these are a non-issue. I've been maxing out both I and EE for years and will continue to do so.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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Re: I Bonds are a screaming buy - Tipswatch

Post by anoop »

I just sold all my I-bonds a year or so ago and effectively closed my TD account in the name of simplifying my financial life. Not going to open it again. If I cannot buy something at my current brokerage, I won't invest in it.

If you know you're going to live 20 more years, and you’re willing to deal with TD, series EE bonds are likely to offer a significantly better return than I-bonds.
Last edited by anoop on Wed Mar 11, 2020 12:03 am, edited 2 times in total.
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Re: I Bonds are a screaming buy - Tipswatch

Post by Noobvestor »

jacoavlu wrote: Tue Mar 10, 2020 9:27 pm the deferred tax on I bond interest I see as a big benefit. In a high tax bracket, the common recommendation would be to put fixed income allocation into 401k. To avoid bond interest at marginal tax rates. Buying i bonds frees up more space in the 401k for equities, where there will be no tax drag.
I would just add to this that for anyone who may be planning (or just incidentally wind up having) some no-income or low-income years before retirement, I Bonds cash-outs can be optimized for tax purposes. For instance: you take a year off from work, or retire before RMDs, etc...
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Re: I Bonds are a screaming buy - Tipswatch

Post by watchnerd »

Noobvestor wrote: Tue Mar 10, 2020 11:57 pm
jacoavlu wrote: Tue Mar 10, 2020 9:27 pm the deferred tax on I bond interest I see as a big benefit. In a high tax bracket, the common recommendation would be to put fixed income allocation into 401k. To avoid bond interest at marginal tax rates. Buying i bonds frees up more space in the 401k for equities, where there will be no tax drag.
I would just add to this that for anyone who may be planning (or just incidentally wind up having) some no-income or low-income years before retirement, I Bonds cash-outs can be optimized for tax purposes. For instance: you take a year off from work, or retire before RMDs, etc...
I hold all my bonds in taxable.

In the current interest rate environment, the tax consequences are pretty 'meh', even in higher brackets.

(bond holdings in sig)
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Re: I Bonds are a screaming buy - Tipswatch

Post by Darth Xanadu »

Ice-9 wrote: Tue Mar 10, 2020 4:06 pm
#Cruncher wrote: Tue Mar 10, 2020 1:35 pm The monthly value of a $25 I Bond is rounded to the nearest penny and larger I Bonds are scalings of this. E.g., each monthly value of a $10,000 I Bond with be 400 times the value of a $25 bond.
This is off the topic of the original post, but thank you #Cruncher for solving one of my biggest mysteries about I-Bonds with this tidbit.

In the mid-2000s, I converted several paper I-bonds to Treasury Direct. Then I began making small purchases online towards an upper-tier of an emergency fund all the way to today. Treasury Direct separates the two types of I-Bonds into two accounts under the same login, with the former being called "Converted Bonds" on the website.

I noticed early on that all of my converted bonds were always full dollar amounts with no cents, but the online purchases always had cents. I hypothesized that maybe this had something to do with the "Converted Bonds" account and different rules for the paper bonds that they originally were. But now that you've explained the above, I realize it's the amounts of each bond. All of my converted bonds are either $5k or $10k, but the largest of my online purchased bonds is $2500. So, thanks for clearing that up!
This is also off the topic of the original post, but I learned (on BH) that one can combine the linked/converted bonds account into one's Primary account.
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Re: I Bonds are a screaming buy - Tipswatch

Post by aristotelian »

watchnerd wrote: Wed Mar 11, 2020 12:10 am I hold all my bonds in taxable.

In the current interest rate environment, the tax consequences are pretty 'meh', even in higher brackets.

(bond holdings in sig)
The problem with bonds in taxable is not so much tax on the interest so much as tax on stock gains if held in 401k.
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Re: I Bonds are a screaming buy - Tipswatch

Post by jacoavlu »

aristotelian wrote: Wed Mar 11, 2020 10:44 am
watchnerd wrote: Wed Mar 11, 2020 12:10 am I hold all my bonds in taxable.

In the current interest rate environment, the tax consequences are pretty 'meh', even in higher brackets.

(bond holdings in sig)
The problem with bonds in taxable is not so much tax on the interest so much as tax on stock gains if held in 401k.
that is in the category of good problems, unless the plan is to never liquidate taxable equities and pass through estate with stepped up basis
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Re: I Bonds are a screaming buy - Tipswatch

Post by watchnerd »

aristotelian wrote: Wed Mar 11, 2020 10:44 am The problem with bonds in taxable is not so much tax on the interest so much as tax on stock gains if held in 401k.
Maybe -- I'm 9.5 years from being able to pull from 401k without penalty.

I don't know what the capital gains vs income tax rate math will be like then.

And we have stocks in taxable, too.
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Re: I Bonds are a screaming buy - Tipswatch

Post by quantAndHold »

Thank you. I was planning to do this, but had forgotten in all the noise.
Yes, I’m really that pedantic.
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Re: I Bonds are a screaming buy - Tipswatch

Post by aristotelian »

jacoavlu wrote: Wed Mar 11, 2020 10:52 am that is in the category of good problems, unless the plan is to never liquidate taxable equities and pass through estate with stepped up basis
Sure it is good problems, but it is an avoidable one when you can have the same growth occur subject to less tax. That said, I know reasonable minds differ and bonds in taxable may make sense in some situations (small 401k with no worries about RMD's etc).
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Re: I Bonds are a screaming buy - Tipswatch

Post by boglewill34 »

Phineas J. Whoopee wrote: Tue Mar 10, 2020 6:20 pm
Watty wrote: Tue Mar 10, 2020 5:27 pm Agreed, one other thing people need to be aware of is that savings bonds are one of the few investments that do not go to your estate at a stepped up cost basis.
Also agreed.

PJW
To clarify, this is a negative aspect, correct?
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Re: I Bonds are a screaming buy - Tipswatch

Post by #Cruncher »

Watty wrote: Tue Mar 10, 2020 5:27 pm … one other thing people need to be aware of is that savings bonds are one of the few investments that do not go to your estate at a stepped up cost basis.
This should not be surprising since the difference between redemption value and original cost is ordinary income, not a capital gain. This is like a zero-coupon bond which pays out its (implicit) interest only at maturity (or when sold prior to maturity). With a zero-coupon bond taxes are due every year on the implicit interest. One can choose do the same with a savings bond's interest, in which case its tax treatment is the same as that of the zero-coupon bond. That most people choose to defer paying taxes until the savings bond is redeemed doesn't change the fact the increase in value is interest income, and not a capital gain.
RandomWord wrote: Tue Mar 10, 2020 5:37 pmIs the value of redeeming these bonds based on compound interest for however long I've had it? Or does it pay a coupon regularly, and then get redeemed for its original face value? Sounds like it's the former?
Yes, it's the former. The word "Bond" in "Series I Savings Bond" is unfortunate since they are more like an inflation indexed savings account than an inflation indexed bond (e.g., a TIPS). But there are a couple of differences from a normal savings account besides the inflation indexing.
  • The real interest rate (i.e., before inflation indexing) is fixed for as long as one holds the bond, up to 30 years.
  • Money can't be added to an existing I Bond. It will be put into a new one with the fixed rate in effect at that time.
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Re: I Bonds are a screaming buy - Tipswatch

Post by RandomWord »

#Cruncher wrote: Wed Mar 11, 2020 1:26 pm
RandomWord wrote: Tue Mar 10, 2020 5:37 pmIs the value of redeeming these bonds based on compound interest for however long I've had it? Or does it pay a coupon regularly, and then get redeemed for its original face value? Sounds like it's the former?
Yes, it's the former. The word "Bond" in "Series I Savings Bond" is unfortunate since they are more like an inflation indexed savings account than an inflation indexed bond (e.g., a TIPS). But there are a couple of differences from a normal savings account besides the inflation indexing.
  • The real interest rate (i.e., before inflation indexing) is fixed for as long as one holds the bond, up to 30 years.
  • Money can't be added to an existing I Bond. It will be put into a new one with the fixed rate in effect at that time.
Thanks!
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