I-Bonds?

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Kaece
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I-Bonds?

Post by Kaece » Thu Sep 21, 2017 11:31 pm

Hi everyone. I'm pretty new here; have been lurking for the last month or so. Question: what are your current thoughts about buying I-Bonds, rather than alternatives such as Vanguard Total Bond Market, for the portion of an AA devoted to fixed income? Although the real rate of I-Bonds currently is 0, the nominal rate seems decent (in the context of current market rates in general) and I-Bonds offer the features of potential future nominal rate increases and tax deferment. Granted, the purchase limit of $20K annually is a constraining factor. That said, is it sensible to tap out that limit before turning to other facilities, such as Total Bond Market? Any and all thought welcome!

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TomatoTomahto
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Re: I-Bonds?

Post by TomatoTomahto » Fri Sep 22, 2017 6:50 am

Welcome to the forum.

We buy IBonds, mostly out of habit. They're a decent, some-liquid, additional Emergency Fund.

I assume that you know that you can only buy them in taxable accounts, directly from Treasury Direct, AFAIK.

Da5id
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Re: I-Bonds?

Post by Da5id » Fri Sep 22, 2017 7:41 am

Kaece wrote:
Thu Sep 21, 2017 11:31 pm
Hi everyone. I'm pretty new here; have been lurking for the last month or so. Question: what are your current thoughts about buying I-Bonds, rather than alternatives such as Vanguard Total Bond Market, for the portion of an AA devoted to fixed income? Although the real rate of I-Bonds currently is 0, the nominal rate seems decent (in the context of current market rates in general) and I-Bonds offer the features of potential future nominal rate increases and tax deferment. Granted, the purchase limit of $20K annually is a constraining factor. That said, is it sensible to tap out that limit before turning to other facilities, such as Total Bond Market? Any and all thought welcome!
They are decent, and you can always cash out after 1 year (with small penalty if < 5 years) if better alternatives arrive. You aren't locked in. You can also contribute more than $10K/person, e.g. by having a sizable tax refund which can be used to purchase paper bonds up to $5k/year/social security #.

aristotelian
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Re: I-Bonds?

Post by aristotelian » Fri Sep 22, 2017 7:45 am

I think it is a good idea to have a portion of your bonds inflation-protected. Usually beats CD's but with greater liquidity and tax advantages. They are a fantastic deal when the fixed rate is >0%, but still a very good investment even without the extra interest.

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TheTimeLord
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Re: I-Bonds?

Post by TheTimeLord » Fri Sep 22, 2017 7:48 am

I agree with the responses you have received so far.
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Jack FFR1846
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Re: I-Bonds?

Post by Jack FFR1846 » Fri Sep 22, 2017 7:48 am

They have sure come in handy for me with a son in college. I still have about $340k in mostly iBonds in paper and bringing them to the credit union at lunchtime (400 yards from my office) to cash and seeing the money "available" by the time I get back to my office has been great for last minute tuition payments. Of course, the interest (when you meet the requirements) is tax free when used for education.

I'm not a fan of having to do them electronically and will admit that I have not bought a bond (besides my federal tax refund) since paper went away. Dealt with selling 2 electronic bonds when my dad passed and don't need to spend 8 hours doing that again in my life.
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Buffetologist
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Re: I-Bonds?

Post by Buffetologist » Fri Sep 22, 2017 7:48 am

I've been meaning to ask. Does it bother anybody that I-bonds are guaranteed to have a negative real return due to the eventual taxes that must be paid on the interest unless we have deflation so bad that 0% is a positive real return. On the other hand, TIPS funds purchased in a tax-protected account with a positive real return can have only positive real returns.

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Rob5TCP
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Re: I-Bonds?

Post by Rob5TCP » Fri Sep 22, 2017 7:52 am

Buffetologist wrote:
Fri Sep 22, 2017 7:48 am
I've been meaning to ask. Does it bother anybody that I-bonds are guaranteed to have a negative real return due to the eventual taxes that must be paid on the interest unless we have deflation so bad that 0% is a positive real return. On the other hand, TIPS funds purchased in a tax-protected account with a positive real return can have only positive real returns.
Your right, in a Roth they would have a small positive return. If bought in an IRA; they would be subject to the same issues as the I Bond. When you withdraw from the IRA, it would be taxed as ordinary income, same as the I Bond. Additionally, I Bonds can be used for education and those just maybe tax free.

So that is an advantage over TIPS (plus the relatively cheap put option of I Bonds).

Buffetologist
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Re: I-Bonds?

Post by Buffetologist » Fri Sep 22, 2017 8:04 am

Rob5TCP wrote:
Fri Sep 22, 2017 7:52 am
Buffetologist wrote:
Fri Sep 22, 2017 7:48 am
I've been meaning to ask. Does it bother anybody that I-bonds are guaranteed to have a negative real return due to the eventual taxes that must be paid on the interest unless we have deflation so bad that 0% is a positive real return. On the other hand, TIPS funds purchased in a tax-protected account with a positive real return can have only positive real returns.
Your right, in a Roth they would have a small positive return. If bought in an IRA; they would be subject to the same issues as the I Bond. When you withdraw from the IRA, it would be taxed as ordinary income, same as the I Bond. Additionally, I Bonds can be used for education and those just maybe tax free.

So that is an advantage over TIPS (plus the relatively cheap put option of I Bonds).
But in an IRA, your tax rate applies to the whole principal, so in asset allocation, I discount the total of all funds in IRAS by my expected tax rate. In that case, you are in fact earning the actual rate of return of a security within the IRA.

For example if I have a 30% tax rate in retirement and there is a bond fund with a 2% interest, it effectively earns 2% in an IRA on 70% of the money, or 1.4% interest in taxable on all of the money.

dcabler
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Re: I-Bonds?

Post by dcabler » Fri Sep 22, 2017 8:18 am

Pretty much what everybody else is saying. My plan is to use them as a supplement to social security, so our plan is to buy them each year until age 70, when we expect to start SS, at which time we will start to cash them in. Given our ages, that should give us 15 years of supplemental, inflation adjusted income. After that, we'll perhaps consider a SPIA.

dcabler
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Re: I-Bonds?

Post by dcabler » Fri Sep 22, 2017 8:20 am

Rob5TCP wrote:
Fri Sep 22, 2017 7:52 am
Buffetologist wrote:
Fri Sep 22, 2017 7:48 am
I've been meaning to ask. Does it bother anybody that I-bonds are guaranteed to have a negative real return due to the eventual taxes that must be paid on the interest unless we have deflation so bad that 0% is a positive real return. On the other hand, TIPS funds purchased in a tax-protected account with a positive real return can have only positive real returns.
Your right, in a Roth they would have a small positive return. If bought in an IRA; they would be subject to the same issues as the I Bond. When you withdraw from the IRA, it would be taxed as ordinary income, same as the I Bond. Additionally, I Bonds can be used for education and those just maybe tax free.

So that is an advantage over TIPS (plus the relatively cheap put option of I Bonds).
I didn't think you could buy I-bonds under any umbrella: Roth, IRA or otherwise.

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Re: I-Bonds?

Post by oldcomputerguy » Fri Sep 22, 2017 8:23 am

I-bonds are not a bad deal. I have a few tucked away in TreasuryDirect. However, I wouldn't consider them to be a replacement for Total Bond, as it's difficult (if not impossible) to rebalance into/out of I-bonds if the need arises. Some combination of the two would, IMHO, certainly be a viable options.
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Da5id
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Re: I-Bonds?

Post by Da5id » Fri Sep 22, 2017 8:27 am

dcabler wrote:
Fri Sep 22, 2017 8:20 am
Rob5TCP wrote:
Fri Sep 22, 2017 7:52 am
Buffetologist wrote:
Fri Sep 22, 2017 7:48 am
I've been meaning to ask. Does it bother anybody that I-bonds are guaranteed to have a negative real return due to the eventual taxes that must be paid on the interest unless we have deflation so bad that 0% is a positive real return. On the other hand, TIPS funds purchased in a tax-protected account with a positive real return can have only positive real returns.
Your right, in a Roth they would have a small positive return. If bought in an IRA; they would be subject to the same issues as the I Bond. When you withdraw from the IRA, it would be taxed as ordinary income, same as the I Bond. Additionally, I Bonds can be used for education and those just maybe tax free.

So that is an advantage over TIPS (plus the relatively cheap put option of I Bonds).
I didn't think you could buy I-bonds under any umbrella: Roth, IRA or otherwise.
You can't. They were suggesting TIPS in a ROTH or IRA.

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DaftInvestor
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Re: I-Bonds?

Post by DaftInvestor » Fri Sep 22, 2017 8:30 am

I like them for three reasons:
1) After 1 year - they also act as a second tier emergency fund (In addition to being part of my bond AA).
2) Buying them expands my tax-deferred space (which would otherwise be full).
3) Adds an inflation-protected component to my bond allocation.

Buffetologist
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Re: I-Bonds?

Post by Buffetologist » Fri Sep 22, 2017 8:41 am

Da5id wrote:
Fri Sep 22, 2017 8:27 am
dcabler wrote:
Fri Sep 22, 2017 8:20 am
Rob5TCP wrote:
Fri Sep 22, 2017 7:52 am
Buffetologist wrote:
Fri Sep 22, 2017 7:48 am
I've been meaning to ask. Does it bother anybody that I-bonds are guaranteed to have a negative real return due to the eventual taxes that must be paid on the interest unless we have deflation so bad that 0% is a positive real return. On the other hand, TIPS funds purchased in a tax-protected account with a positive real return can have only positive real returns.
Your right, in a Roth they would have a small positive return. If bought in an IRA; they would be subject to the same issues as the I Bond. When you withdraw from the IRA, it would be taxed as ordinary income, same as the I Bond. Additionally, I Bonds can be used for education and those just maybe tax free.

So that is an advantage over TIPS (plus the relatively cheap put option of I Bonds).
I didn't think you could buy I-bonds under any umbrella: Roth, IRA or otherwise.
You can't. They were suggesting TIPS in a ROTH or IRA.
Exactly. I think TIPS in ROTH or an IRA will outperform I-bonds in a taxable on an after-tax basis unless there is severe deflation and the 0% bound of the I-bonds kicks in. Do folks agree?

J295
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Re: I-Bonds?

Post by J295 » Fri Sep 22, 2017 8:44 am

Welcome Kaece.

We are 58 and retired, and happily hold ibonds as part of our "non-equity" portfolio (along with cash, CDs, BND, floating rate fund, etc.). For us the ibonds are a nice safe part of our mix. I don't really view them as a stand alone investment as much as part of an overall plan (hint: I highly recommend you spend time developing an Investment Policy Statement -- see the wiki or view other posts for more info).

financeidiot
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Re: I-Bonds?

Post by financeidiot » Fri Sep 22, 2017 9:11 am

Buffetologist wrote:
Fri Sep 22, 2017 7:48 am
I've been meaning to ask. Does it bother anybody that I-bonds are guaranteed to have a negative real return due to the eventual taxes that must be paid on the interest unless we have deflation so bad that 0% is a positive real return. On the other hand, TIPS funds purchased in a tax-protected account with a positive real return can have only positive real returns.
Yes, but is it more important to have a positive real return on inflation-protected bonds with low expected total return by using tax-advantaged accounts or maximizing your tax-advantaged space to protect higher-earning assets?

I personally would rather accept a small loss on I-bond returns due to taxes than holding TIPS in my tax-advantaged accounts and shifting equities to taxable accounts. I haven't maxed out available short-term CD's with above inflation interest rates (3% through Navy Federal), so I've not yet bought I-Bonds. When CD rates are less promising, my tax bracket is higher, or I-Bonds offer higher fixed interest rates, I will most likely switch.

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SteelyEyed
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Re: I-Bonds?

Post by SteelyEyed » Fri Sep 22, 2017 9:41 am

I have used them the other way around in the past: once my tax-advantaged savings space was filled up, I bought I-Bonds with extra savings. They're not incredible, but they did what they were supposed to do. I expect my income to be lower next year, below the income limit, and I will roll 100% of them into our 529s.

beehappy
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Re: I-Bonds?

Post by beehappy » Fri Sep 22, 2017 1:53 pm

Buffetologist wrote:
Fri Sep 22, 2017 7:48 am
I've been meaning to ask. Does it bother anybody that I-bonds are guaranteed to have a negative real return due to the eventual taxes that must be paid on the interest unless we have deflation so bad that 0% is a positive real return. On the other hand, TIPS funds purchased in a tax-protected account with a positive real return can have only positive real returns.
I suppose it depends on why you're buying iBonds. I've maxed out my tax-advantaged space with (mostly) equities
So I only buy iBonds using funds that I'd otherwise hold in cash . They hold most of my emergency funds. So the tax deferral is a big draw, and it's a nice bonus that the interest rate is higher than so-called high yield savings account.

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Re: I-Bonds?

Post by beardsworth » Thu Sep 28, 2017 10:25 am

Da5id wrote:
Fri Sep 22, 2017 7:41 am
Kaece wrote:
Thu Sep 21, 2017 11:31 pm
Hi everyone. I'm pretty new here; have been lurking for the last month or so. Question: what are your current thoughts about buying I-Bonds, rather than alternatives such as Vanguard Total Bond Market, for the portion of an AA devoted to fixed income? Although the real rate of I-Bonds currently is 0, the nominal rate seems decent (in the context of current market rates in general) and I-Bonds offer the features of potential future nominal rate increases and tax deferment. Granted, the purchase limit of $20K annually is a constraining factor. That said, is it sensible to tap out that limit before turning to other facilities, such as Total Bond Market? Any and all thought welcome!
They are decent, and you can always cash out after 1 year (with small penalty if < 5 years) if better alternatives arrive. You aren't locked in. You can also contribute more than $10K/person, e.g. by having a sizable tax refund which can be used to purchase paper bonds up to $5k/year/social security #.
The phrase I've bold-faced above is not correct.

The ability to receive a portion of tax refund as paper I Bonds, is limited to a maximum of $5,000 per tax return, not per taxpayer Social Security number.

I've personally corresponded with Treasury Direct on this subject, observing that there is an ambiguity in the language used about this subject by Treasury Direct, IRS, and even the IRS Form 8888, all of which repeatedly state that "you" may receive up to $5,000 of "your" federal tax refund as paper I Bonds, but never defines who is meant by "you," specifically whether "you" can mean more than one person on the same tax return.

I therefore asked Treasury Direct: Does this $5,000 maximum amount of paper I Bonds apply on a per-tax-return basis, or per filing taxpayer? Can a couple who is "married filing jointly" each receive up to $5,000 of tax refund as paper I Bonds, i.e., up to $10,000 for the couple?

Treasury Direct replied: "The limitation applies for the Social Security Number provided for the first-named registrant, usually the individual named first on the IRS tax return. A second-named registrant may be provided for the bond registration."

Contrary to the boldfaced phrase above, the limit on paper I Bonds is therefore not $5,000 per Social Security number but $5,000 per tax return, even if there are two joint filers.

See also the Bogleheads Wiki, which likewise specifies "per return":

https://www.bogleheads.org/wiki/I_savin ... tax_refund

While the maximum purchase of electronic Savings Bonds per year is indeed determined per-Social-Security-number, the option to choose tax-refund-as-paper-I-Bonds operates differently.

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Re: I-Bonds?

Post by Chuck » Thu Sep 28, 2017 10:43 am

Buffetologist wrote:
Fri Sep 22, 2017 7:48 am
[...] Does it bother anybody that I-bonds are guaranteed to have a negative real return due to the eventual taxes that must be paid on the interest? [...]
It bothers me, but it's the best of available options for liquid cash.

Local Credit Union savings = 0.15%
Ally Bank savings = 1.15%
Series I Savings bonds = 1.96%

You may counter that I-Bonds' 1.96% is only guaranteed for 6 months. I counter the rate on a savings account is only guaranteed for today.

Whenever you evaluate an option, you always have to say "compared to what?"

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Re: I-Bonds?

Post by flamesabers » Thu Sep 28, 2017 10:47 am

Kaece wrote:
Thu Sep 21, 2017 11:31 pm
Hi everyone. I'm pretty new here; have been lurking for the last month or so. Question: what are your current thoughts about buying I-Bonds, rather than alternatives such as Vanguard Total Bond Market, for the portion of an AA devoted to fixed income? Although the real rate of I-Bonds currently is 0, the nominal rate seems decent (in the context of current market rates in general) and I-Bonds offer the features of potential future nominal rate increases and tax deferment. Granted, the purchase limit of $20K annually is a constraining factor. That said, is it sensible to tap out that limit before turning to other facilities, such as Total Bond Market? Any and all thought welcome!
I think it depends a lot on your circumstances. If say you're deciding between contributing to your IRA/401k and buying I-Bonds, I would suggest going with the former option. If on the other hand you already max out your retirement accounts and are looking to bolster your fixed income in a tax-deferred account, I think I-Bonds would be a good choice.

While it's straightforward to buy and redeem I-Bonds on Treasury Direct, the website doesn't email/mail you statements or reminders of the I-Bonds you redeem in a fiscal year. You'll need to set a reminder to yourself to log into Treasury Direct when you file your tax returns.

In regards to limits, you can only purchase $10k of electronic I-Bonds per year for each SSN (Along with I-Bonds you can purchase $10k worth of EE-Bonds per year per SSN but you can't mix the two limits together to buy $20k of I-Bonds and $0 EE-Bonds). You can also get $5k of paper I-Bonds from your federal tax return every year.

Da5id
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Re: I-Bonds?

Post by Da5id » Thu Sep 28, 2017 11:46 am

beardsworth wrote:
Thu Sep 28, 2017 10:25 am
Da5id wrote:
Fri Sep 22, 2017 7:41 am
Kaece wrote:
Thu Sep 21, 2017 11:31 pm
Hi everyone. I'm pretty new here; have been lurking for the last month or so. Question: what are your current thoughts about buying I-Bonds, rather than alternatives such as Vanguard Total Bond Market, for the portion of an AA devoted to fixed income? Although the real rate of I-Bonds currently is 0, the nominal rate seems decent (in the context of current market rates in general) and I-Bonds offer the features of potential future nominal rate increases and tax deferment. Granted, the purchase limit of $20K annually is a constraining factor. That said, is it sensible to tap out that limit before turning to other facilities, such as Total Bond Market? Any and all thought welcome!
They are decent, and you can always cash out after 1 year (with small penalty if < 5 years) if better alternatives arrive. You aren't locked in. You can also contribute more than $10K/person, e.g. by having a sizable tax refund which can be used to purchase paper bonds up to $5k/year/social security #.
The phrase I've bold-faced above is not correct.
I'll believe you, but the quote from the treasury website https://www.treasurydirect.gov/indiv/re ... s_ibuy.htm is nonsensical if read like that. The plain interpretation of "per Social Security Number" is, well, "per Social Security Number".
(For paper I bonds bought with your IRS tax refund, you can buy up to $5,000 per year, per Social Security Number).
If it said "per Tax Return" that would be much much clearer...

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Re: I-Bonds?

Post by abuss368 » Thu Sep 28, 2017 11:51 am

Kaece wrote:
Thu Sep 21, 2017 11:31 pm
Hi everyone. I'm pretty new here; have been lurking for the last month or so. Question: what are your current thoughts about buying I-Bonds, rather than alternatives such as Vanguard Total Bond Market, for the portion of an AA devoted to fixed income? Although the real rate of I-Bonds currently is 0, the nominal rate seems decent (in the context of current market rates in general) and I-Bonds offer the features of potential future nominal rate increases and tax deferment. Granted, the purchase limit of $20K annually is a constraining factor. That said, is it sensible to tap out that limit before turning to other facilities, such as Total Bond Market? Any and all thought welcome!
Hi Kaece -

How exposed to unexpected inflation are you? If you are early in your career and have a fair amount of time until retirement, your exposure may reduced when considering future wage adjustments. Many years ago we invested in the Vanguard Intermediate Term TIPS fund. We sold very shortly thereafter and combined with Total Bond Index. This has worked very well and has the benefit of simplicity.

Total Bond Index is an investment grade bond fund that is very low cost and diversified. For good reason it is the largest bond fund on the planet!

Best.
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aqan
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Re: I-Bonds?

Post by aqan » Thu Sep 28, 2017 12:58 pm

Da5id wrote:
Fri Sep 22, 2017 7:41 am
Kaece wrote:
Thu Sep 21, 2017 11:31 pm
Hi everyone. I'm pretty new here; have been lurking for the last month or so. Question: what are your current thoughts about buying I-Bonds, rather than alternatives such as Vanguard Total Bond Market, for the portion of an AA devoted to fixed income? Although the real rate of I-Bonds currently is 0, the nominal rate seems decent (in the context of current market rates in general) and I-Bonds offer the features of potential future nominal rate increases and tax deferment. Granted, the purchase limit of $20K annually is a constraining factor. That said, is it sensible to tap out that limit before turning to other facilities, such as Total Bond Market? Any and all thought welcome!
They are decent, and you can always cash out after 1 year (with small penalty if < 5 years) if better alternatives arrive. You aren't locked in. You can also contribute more than $10K/person, e.g. by having a sizable tax refund which can be used to purchase paper bonds up to $5k/year/social security #.
I've always wondered how to go about buying paper bonds. Any info will be appreciated

Da5id
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Re: I-Bonds?

Post by Da5id » Thu Sep 28, 2017 1:03 pm

aqan wrote:
Thu Sep 28, 2017 12:58 pm
I've always wondered how to go about buying paper bonds. Any info will be appreciated
They stopped selling paper I-bonds 5-6 years ago. But paper bonds are all they give for tax refunds. The ways of the government are mysterious... All explained pretty well here: https://www.treasurydirect.gov/indiv/re ... ibonds.htm

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Re: I-Bonds?

Post by flamesabers » Thu Sep 28, 2017 1:07 pm

aqan wrote:
Thu Sep 28, 2017 12:58 pm
I've always wondered how to go about buying paper bonds. Any info will be appreciated
You need to complete part II on form 8888 to buy paper I-Bonds with your tax refund. You must purchase the I-Bonds in increments of $50.

https://www.irs.gov/pub/irs-pdf/f8888.pdf

learning_head
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Re: I-Bonds?

Post by learning_head » Thu Sep 28, 2017 2:21 pm

Chuck wrote:
Thu Sep 28, 2017 10:43 am
Buffetologist wrote:
Fri Sep 22, 2017 7:48 am
[...] Does it bother anybody that I-bonds are guaranteed to have a negative real return due to the eventual taxes that must be paid on the interest? [...]
It bothers me, but it's the best of available options for liquid cash.

Local Credit Union savings = 0.15%
Ally Bank savings = 1.15%
Series I Savings bonds = 1.96%

You may counter that I-Bonds' 1.96% is only guaranteed for 6 months. I counter the rate on a savings account is only guaranteed for today.

Whenever you evaluate an option, you always have to say "compared to what?"
IBonds should be compared to 5 year CDs IMO with low penalties. IBonds themselves have a small penalty for 5 years and illiquid the first year, so I think 5-year CD rates are most comparable. Today, around 2.5% for the best ones.

CDs have advantage in that rates are in fact fixed, unlike IBonds, for those 5 years.

IBonds might be good if your marginal tax rate in year of cashing out is much less than current marginal tax rate.

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Mel Lindauer
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Re: I-Bonds?

Post by Mel Lindauer » Thu Sep 28, 2017 4:21 pm

In addition to the above-mentioned tax shifting from a current high tax bracket to a lower tax bracket when redeeming the I Bonds, they can also be used tax-free for qualifying educational expenses.
Best Regards - Mel | | Semper Fi

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Re: I-Bonds?

Post by GuineaPig » Thu Sep 28, 2017 6:39 pm

Mel Lindauer wrote:
Thu Sep 28, 2017 4:21 pm
In addition to the above-mentioned tax shifting from a current high tax bracket to a lower tax bracket when redeeming the I Bonds, they can also be used tax-free for qualifying educational expenses.
I have considered this one of the biggest strengths of I-Bonds, since I'm planning to use them for the education of my children. I do have a question about this though: I understand that the bonds can be used tax-free in this situation. However, will the untaxed income be counted as MAGI? And will it be counted as income by financial aid forms? I haven't been able to find these questions addressed anywhere.

learning_head
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Re: I-Bonds?

Post by learning_head » Fri Sep 29, 2017 6:25 pm

Mel Lindauer wrote:
Thu Sep 28, 2017 4:21 pm
In addition to the above-mentioned tax shifting from a current high tax bracket to a lower tax bracket when redeeming the I Bonds, they can also be used tax-free for qualifying educational expenses.
Good reminder; but only applies within your MAGI limits (in 2016, married joint filing MAGI < 146k, or for single, < 92)

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Mel Lindauer
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Re: I-Bonds?

Post by Mel Lindauer » Fri Sep 29, 2017 7:28 pm

learning_head wrote:
Fri Sep 29, 2017 6:25 pm
Mel Lindauer wrote:
Thu Sep 28, 2017 4:21 pm
In addition to the above-mentioned tax shifting from a current high tax bracket to a lower tax bracket when redeeming the I Bonds, they can also be used tax-free for qualifying educational expenses.
Good reminder; but only applies within your MAGI limits (in 2016, married joint filing MAGI < 146k, or for single, < 92)
Here's a workaround. If you see yourself moving close to the MAGI cutoff figure, you can always redeem the I Bonds prior to reaching it and then put the ENTIRE proceeds into a 529 Plan. That's a tax-free event since the 529 Plan is a qualifying educational expense.
Best Regards - Mel | | Semper Fi

beardsworth
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Re: I-Bonds?

Post by beardsworth » Sat Sep 30, 2017 9:48 am

Da5id wrote:
Thu Sep 28, 2017 11:46 am
beardsworth wrote:
Thu Sep 28, 2017 10:25 am
Da5id wrote:
Fri Sep 22, 2017 7:41 am
Kaece wrote:
Thu Sep 21, 2017 11:31 pm
Hi everyone. I'm pretty new here; have been lurking for the last month or so. Question: what are your current thoughts about buying I-Bonds, rather than alternatives such as Vanguard Total Bond Market, for the portion of an AA devoted to fixed income? Although the real rate of I-Bonds currently is 0, the nominal rate seems decent (in the context of current market rates in general) and I-Bonds offer the features of potential future nominal rate increases and tax deferment. Granted, the purchase limit of $20K annually is a constraining factor. That said, is it sensible to tap out that limit before turning to other facilities, such as Total Bond Market? Any and all thought welcome!
They are decent, and you can always cash out after 1 year (with small penalty if < 5 years) if better alternatives arrive. You aren't locked in. You can also contribute more than $10K/person, e.g. by having a sizable tax refund which can be used to purchase paper bonds up to $5k/year/social security #.
The phrase I've bold-faced above is not correct. [remainder of beardsworth post above removed here]
I'll believe you, but the quote from the treasury website https://www.treasurydirect.gov/indiv/re ... s_ibuy.htm is nonsensical if read like that. The plain interpretation of "per Social Security Number" is, well, "per Social Security Number".
(For paper I bonds bought with your IRS tax refund, you can buy up to $5,000 per year, per Social Security Number).
If it said "per Tax Return" that would be much much clearer...
I agree that that language on your linked Treasury Direct page, referring to $5,000 of tax refund paper I Bonds "per Social Security number" is misleading and would create the perfectly logical impression that a couple who are "married filing jointly" (two names, two Social Security numbers) could each buy up to $5,000 of paper I Bonds, assuming that their federal tax refund was large enough to cover such an amount.

After this exchange of posts, I actually wrote to Treasury Direct again, wanting to see if I got the same answer as in previous correspondence. And I asked, in view of the text on that web page, if the correct rule really is $5,000 for each Social Security number appearing on the return, or (as Treasury Direct had previously stated to me) $5,000 total, regardless of the number of filers, and "belonging" only to the first-named person on the return (although joint registrations remain possible for the bonds themselves).

Treasury Direct didn't "direct"ly answer the question, but instead referred me to the IRS Form 8888 instructions, specifically Part II, the section for allocating tax refund to paper I Bonds. The language there states: "You may request up to three different savings bond registrations. However, each registration must be a multiple of $50, and the total of lines 4, 5a, and 6a [all of the different registrations designated] can't be more than $5,000 (or your refund amount, whichever is smaller)."

Moneybags1
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Re: I-Bonds?

Post by Moneybags1 » Sun Nov 05, 2017 6:52 am

I have a TD account that I haven't visited in nearly 10 years since the rates were pathetic, I bought I Bonds for nieces and nephews there. I've seen somewhere else on Bogleheads to utilize I bonds in your taxable space to defer taxes and thought I'd give this another look.. But the problem is, is I need about $100k to disappear and from what I read here, there is a $10k limit per year, is that the case?

Another question is I have bought I bonds in the TD account for 2 children not related to me by blood by a family whom we have since have nothing to do with each other, going on nearly a decade.. Has anyone had experience with transferring the I Bonds from one set of kids to another inside of a single TD account? I have looked into it in the past and cannot find out how to do this, provided it is allowed, short of phoning Treasury Direct which I haven't done as of yet.

Many Thanks,
Mike

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nisiprius
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Re: I-Bonds?

Post by nisiprius » Sun Nov 05, 2017 7:18 am

For as long as I've been paying attention, which is since the 1970s, savings bonds in general, and Series I savings bonds (introduced in 1998) in particular, have been "a good deal." Because of their unique combination of features it's hard to compare them with other things, but in my opinion they have always been noticeably better than the best bank accounts. As others have said, they're not magic. For many people, though, I think they should be a "check-off-the-box-just-do-it" part of their investing plan.

I bonds are good investments on the merits and should be seriously considered for the "low risk" part of any saver in the "mass affluent" income category. They've always been popular in the forum and Mel Lindauer did yeomen work bringing them to people's attention some years before I joined.

There are three "problems" with Series I savings bonds apart from their merits.

1) Nobody makes much money out of them. I don't think banks did when you could get them at banks, which is no longer possible. "Investment" firms and advisors can't make any money out of them. And, for whatever reasons, the government no longer promotes or publicizes them. So relatively few people have heard of them, and people find it hard to believe that this investment they haven't heard much about could be all that good.

2) The arrangements for purchasing, holding, and redeeming them are unfamiliar and IMHO a little awkward. It's one more online account to fiddle with.

3) The purchase limit, currently $10,000/year per person, is low. Some advisors, asked why they don't ever mention them, have said dismissively "they're no use to my clients because of the purchase limit." But for a "mass affluent" couple, a total of $20,000/year isn't chump change and is certainly enough to be a useful part of a retirement savings program.

I bought a big chunk of I bonds in 1999, in the Good Old Days, long gone, of $30,000/person/year limits and 3%-above-inflation rates. At the time I thought they were a dumb, safe, unsophisticated purchase, and I am still amazed that, so far, since I bought them they have been comparable in total return to stocks. I don't think there's a chance that could happen again, but at the time I bought them, I didn't think there was a chance it could happen then! Since January 1999, $10,000 in an I bond has grown to over $28,000, compared to $33,000 if invested in the Vanguard Total Stock Market Index Fund. That's about 5.9% annualized for I bonds, 6.8% for stocks--in the closest thing to a risk-free investment there is. (Virtually no credit risk; no interest rate risk, unlike "normal" bonds I bonds aren't marketable and don't respond to interest rate changes; and of course no crashes in 2002 or 2008).
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.

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Re: I-Bonds?

Post by whomever » Sun Nov 05, 2017 8:50 am

But the problem is, is I need about $100k to disappear and from what I read here, there is a $10k limit per year, is that the case?
The limit is $10k from Treasury Direct personally, and $10k from TD for a trust, and $5k in paper bonds via tax refund, so $25k total if you're single. If you're married, the better half can get their own $10k + $10k from TD, so a couple could total $45k. I think the tax refund thing is per return, so MFJ means only one $5k allotment. If you file separately might get another $5k.

I haven't done the trust thing. If you don't have a trust already, I dunno if it's 10 minutes for a Nolo trust or an expensive trip to the lawyer or what.

I've done the tax refund paper bond thing twice. Once I got the bonds, and once I got a refund check w/ no explanation why they didn't send bonds (we filled out the returns the same both times, AFAICT).

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Re: I-Bonds?

Post by bobbd » Thu Dec 07, 2017 10:16 am

Does anyone know regarding the purchase of I BONDS with tax refund and you buy $5000 do you get a $5000 Bond or multiple bonds to total $5000 ?
" When the facts change. I change my mind, what do you do sir? J.M. Keynes

Da5id
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Re: I-Bonds?

Post by Da5id » Thu Dec 07, 2017 10:27 am

bobbd wrote:
Thu Dec 07, 2017 10:16 am
Does anyone know regarding the purchase of I BONDS with tax refund and you buy $5000 do you get a $5000 Bond or multiple bonds to total $5000 ?
I've not done exactly $5000. According to Treasury web site below are possible denominations https://www.treasurydirect.gov/indiv/pr ... glance.htm
Denominations: Paper bonds with your tax refund: $50, $100, $200, $500, $1,000
(edited to remove wrong speculation, actual answer from beardsworth below)
Last edited by Da5id on Thu Dec 07, 2017 10:37 am, edited 1 time in total.

beardsworth
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Re: I-Bonds?

Post by beardsworth » Thu Dec 07, 2017 10:32 am

bobbd wrote:
Thu Dec 07, 2017 10:16 am
Does anyone know regarding the purchase of I BONDS with tax refund and you buy $5000 do you get a $5000 Bond or multiple bonds to total $5000 ?
Every time we've done it, we've received six $50 paper bonds, one $200, one $500, and four $1000.

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Re: I-Bonds?

Post by friar1610 » Thu Dec 07, 2017 10:57 am

About 1/3 of our FI is in I-Bonds. About 1/6 is in a CDC ladder (taxable) and the remainder is in Total Bond in IRAs. Don't know if this is the ideal plan but I feel like we have our bases pretty well covered. We are retirees in the RMD stage. The I-Bonds add a bit of inflation protection to our inflation-adjusted military pension and SS.
Friar1610

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Re: I-Bonds?

Post by Chuck » Thu Dec 07, 2017 11:18 am

friar1610 wrote:
Thu Dec 07, 2017 10:57 am
About 1/3 of our FI is in I-Bonds. About 1/6 is in a CDC ladder (taxable) and the remainder is in Total Bond in IRAs. Don't know if this is the ideal plan but I feel like we have our bases pretty well covered. We are retirees in the RMD stage. The I-Bonds add a bit of inflation protection to our inflation-adjusted military pension and SS.
Re: "Don't know if this is the ideal plan"

My non-equity assets are a smorgasbord of "bond-like things," 15% of which are Series I Savings Bonds. I feel fine. As long as it has yield, and the principal is "pretty safe," it goes in. :) More than one road, etc.

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Re: I-Bonds?

Post by Thesaints » Thu Dec 07, 2017 12:11 pm

bobbd wrote:
Thu Dec 07, 2017 10:16 am
Does anyone know regarding the purchase of I BONDS with tax refund and you buy $5000 do you get a $5000 Bond or multiple bonds to total $5000 ?
They will always issue five $50’s and the rest of the amount in such denominations as to use the least number of bonds.

The rule leaves an uncertainty in case the amount is $400, since the residual $150 could still be issued as a $100 plus another $50, or two $75’s, but I believe it will be the former and the $75 denomination has gone the way of the $10,000 and $5,000.

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inittowinit
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Re: I-Bonds?

Post by inittowinit » Thu Dec 07, 2017 1:50 pm

I hold 1/3 of my emergency fund in I-bonds and intend to increase that proportion to 50%+ over the next 1-2 years.

Tax deferral and inflation protection make them preferable to HY savings and CDs IMO.

The drawbacks to account for are the 1-year "lockup" period after purchase, interest penalty for <5yr redemptions, and slight reduction in liquidity vs cash.

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Re: I-Bonds?

Post by Thesaints » Thu Dec 07, 2017 3:01 pm

Why not 100% of emergency funds ?

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Re: I-Bonds?

Post by flamesabers » Thu Dec 07, 2017 3:12 pm

Thesaints wrote:
Thu Dec 07, 2017 3:01 pm
Why not 100% of emergency funds ?
I would say for the same reason why it's not recommended to have only one credit card or have credit cards with only one bank. If you ever need to use your emergency funds you don't want it to be when the Treasury Direct website is down for maintenance or you get locked out of your Treasury Direct account.

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Re: I-Bonds?

Post by Thesaints » Thu Dec 07, 2017 3:15 pm

flamesabers wrote:
Thu Dec 07, 2017 3:12 pm
Thesaints wrote:
Thu Dec 07, 2017 3:01 pm
Why not 100% of emergency funds ?
I would say for the same reason why it's not recommended to have only one credit card or have credit cards with only one bank. If you ever need to use your emergency funds you don't want it to be when the Treasury Direct website is down for maintenance or you get locked out of your Treasury Direct account.
It should be a really real emergency. The same kind of emergency when cash in a bank account can't help either.

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Re: I-Bonds?

Post by sketchy9 » Thu Dec 07, 2017 4:37 pm

Thesaints wrote:
Thu Dec 07, 2017 3:15 pm
flamesabers wrote:
Thu Dec 07, 2017 3:12 pm
Thesaints wrote:
Thu Dec 07, 2017 3:01 pm
Why not 100% of emergency funds ?
I would say for the same reason why it's not recommended to have only one credit card or have credit cards with only one bank. If you ever need to use your emergency funds you don't want it to be when the Treasury Direct website is down for maintenance or you get locked out of your Treasury Direct account.
It should be a really real emergency. The same kind of emergency when cash in a bank account can't help either.
I see absolutely no downside to keeping 100% of EF with TreasuryDirect. Sure, they might be down for maintenance at the precise hour you try to login, but who cares? Login tomorrow. It's an emergency fund, meant to help you pay your bills if you lose your job, or for the heart bypass that you didn't know you needed. It's not a "disaster fund" that you grab on your way out the door when the fire department tells you that you have 2 minutes to evacuate, or use to buy goods after the 8.5 earthquake has knocked your city back to the 19th century. I feel like a lot people conflate the two sets of needs, and they're quite dissimilar.

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Re: I-Bonds?

Post by John151 » Thu Dec 07, 2017 4:43 pm

I Bonds make up about 30% of my bond holdings, and I’m adding the legal maximum to them every year. They’re safe, they offer some inflation protection, the interest they pay is tax-deferred, and their yields are better than anything I can find in bank CD’s. In my opinion, I Bonds are an excellent investment.

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Re: I-Bonds?

Post by Thesaints » Thu Dec 07, 2017 5:06 pm

John151 wrote:
Thu Dec 07, 2017 4:43 pm
they offer some inflation protection
That's the only thing most recent issues offer :)

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Re: I-Bonds?

Post by anoop » Thu Dec 07, 2017 10:34 pm

I-bonds are the best investment ever.

Read this blog to get more info:
https://tipswatch.com/tracking-inflation-and-i-bonds/
(see the bottom of the post on why they are great investment.)

I wish it was not limited to only $10K per year. And I wish my 401k offer TIPS (even a fund).

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