Is ibond always better than taxable?

[fcf18]

I put some money into taxable each year after I max out 401k (no mega backdoor possible), backdoor Roth, and some money for 529.

However, I have been reading up on ibond, seems like a good choice for anyone who has bond allocation, CD and can invest in taxable. Yet I don't hear many people using that option, am I missing something? Shouldn't most people invest in the 10k ibond before putting money into taxable?

[smectym]

It can be a sound choice. However, some investors no longer find it a *compelling* case due to (a) the low fixed rate, and (b) continued low rates of nominal inflation (the I bond is linked to an official measure of inflation, CPI-U, which many investors believe is gamed to understate "actual" inflation https://www.investopedia.com/articles/0 ... eindex.asp).

We bought a lot of I bonds about 15-20 years ago, they're currently yielding between 3-4%. So compared to what is available currently in the bond market, a good investment. But nothing earth-shattering. We're happy to have them, they provide a sense of security because they won't go down and, of course, provide a basic level of inflation protection, even if the index they're linked to may be suspect.

You can't go "wrong" by investing in I bonds. Are they a "no-brainer?" Tepid interest by investors suggests, maybe not

[cochlearboy]

I put some money into taxable each year after I max out 401k (no mega backdoor possible), backdoor Roth, and some money for 529.

However, I have been reading up on ibond, seems like a good choice for anyone who has bond allocation, CD and can invest in taxable. Yet I don't hear many people using that option, am I missing something? Shouldn't most people invest in the 10k ibond before putting money into taxable?

The issue with i-bonds right now is the very low interest rate environment. I personally have some ibonds at the 0.5% rate when it was available last year. But, the current 0.2 % rate is not attractive at all... I also only use the ibonds as part of my emergency fund (i.e., break glass when something happens). Honestly, depending on your age and your risk profile, you might be better off dumping your excess investments in VTI. This is exactly what I do with my excess investments after maxing out my retirement accounts.

There are some posters here that wisely purchased ibonds back in 2007-2009 at a 4-6% rate (i.e., not counting the inflation component). Those are some ibonds that I would instantly buy $10k today from TreasuryDirect.

[Golfview]

I Bonds are not taxed at the state and local level but are fully taxed at the federal level!

[SlowMovingInvestor]

I started reading seriously about ibonds only 1-2 days back after some threads here. The small amount you can deploy makes them not very attractive to me right now, but I do wish I had considered them in the past.

[boglenomics]

I Bonds are not taxed at the state and local level but are fully taxed at the federal level!

They're tax deferred at the federal level.

[BV3273]

I think they are a good option for a multi tier emergency fund. That’s about it.

[dbr]

I Bonds are not taxed at the state and local level but are fully taxed at the federal level!

They're tax deferred at the federal level.

Right. And a consideration is that tax deferral of the interest and inflation increment lasts 30 years at which point the bond stops paying interest and the deferred income becomes taxable. A person buying I bonds at age 35 would want to be aware that at age 65 he will get a big bump in taxable income. It is also an option to not defer the taxation. Also, I bonds are not tax deferred in the sense of the principal not being taxed up front as is the case with a trad IRA or a 401k.

I bonds are an option but it would hardly be true that I bonds are ALWAYS better for taxable fixed income investing than anything and everything else.

[TheLaughingCow]

I've heard that I bonds can be a major pain in the butt to deal with, especially for heirs or surviving spouses. Ask yourself it's worth the trouble when you can get similar characteristics from TIPS.

[dbr]

I've heard that I bonds can be a major pain in the butt to deal with, especially for heirs or surviving spouses. Ask yourself it's worth the trouble when you can get similar characteristics from TIPS.

Actually the reason we don't have any I bonds is to avoid having still another account, this time at Treasury Direct. We did open an account and had some I bonds, but about the time they sent out the little plastic decoder ring* to access your account I had had enough. We redeemed the bonds and got out of Dodge.

*They actually sent out a plastic card that had a code system for getting into your account. I'm sure that is long gone, but who needs the aggravation?

Yes, you can read about issues dealing with TD. Other people will say they have no problems and all is well. I suspect almost all the time all is well.

[digit8]

I've heard that I bonds can be a major pain in the butt to deal with, especially for heirs or surviving spouses. Ask yourself it's worth the trouble when you can get similar characteristics from TIPS.

I actually always had an easy experience with Ibonds, less than 2 minutes to get in and do whatever I needed to. That said, I trimmed the Ibond portion of our portfolio as part of a general life move to simplicity, and it doesn't seem to have hurt too much.

[Phineas J. Whoopee]

I've heard that I bonds can be a major pain in the butt to deal with, especially for heirs or surviving spouses. Ask yourself it's worth the trouble when you can get similar characteristics from TIPS.

Actually the reason we don't have any I bonds is to avoid having still another account, this time at Treasury Direct. We did open an account and had some I bonds, but about the time they sent out the little plastic decoder ring* to access your account I had had enough. We redeemed the bonds and got out of Dodge.

*They actually sent out a plastic card that had a code system for getting into your account. I'm sure that is long gone, but who needs the aggravation?

Yes, you can read about issues dealing with TD. Other people will say they have no problems and all is well. I suspect almost all the time all is well.

This is not a personal criticism of you, dbr, because many people write similar posts.

It constantly amazes me when posters complain about security measures protecting substantial assets.

The secret decoder ring ridicule in part led to Treasury Direct switching to less-secure email. The card is something you have. Your email credentials are simply a second thing you know. They downgraded from two-factor to one-factor authentication.

PJW

[dbr]

I've heard that I bonds can be a major pain in the butt to deal with, especially for heirs or surviving spouses. Ask yourself it's worth the trouble when you can get similar characteristics from TIPS.

Actually the reason we don't have any I bonds is to avoid having still another account, this time at Treasury Direct. We did open an account and had some I bonds, but about the time they sent out the little plastic decoder ring* to access your account I had had enough. We redeemed the bonds and got out of Dodge.

*They actually sent out a plastic card that had a code system for getting into your account. I'm sure that is long gone, but who needs the aggravation?

Yes, you can read about issues dealing with TD. Other people will say they have no problems and all is well. I suspect almost all the time all is well.

This is not a personal criticism of you, dbr, because many people write similar posts.

It constantly amazes me when posters complain about security measures protecting substantial assets.

The secret decoder ring ridicule in part led to Treasury Direct switching to less-secure email. The card is something you have. Your email credentials are simply a second thing you know. They downgraded from two-factor to one-factor authentication.

PJW

There is a point there. On the other hand the security of my investments at TD is moot.

[aceoperations]

iBonds are tax-deferred but can be withdrawn tax-free for educational purposes. We use the iBond as an emergency fund, fixed asset allocation and possible future college fund outside the 529.

[Unladen_Swallow]

Shouldn't most people invest in the 10k ibond before putting money into taxable?

We have no iBonds. We have a Taxable account with 100% Total Stock fund. This works for us, do what works for you.

P.S - I would prefer cash to iBonds if I had to hold fixed income.

[brad.clarkston]

I put some money into taxable each year after I max out 401k (no mega backdoor possible), backdoor Roth, and some money for 529.

However, I have been reading up on ibond, seems like a good choice for anyone who has bond allocation, CD and can invest in taxable. Yet I don't hear many people using that option, am I missing something? Shouldn't most people invest in the 10k ibond before putting money into taxable?

I hold 30% of my FI in a combination of bank CD's/EE Bonds/I Bonds/Tbills (the other 10% is in FXNAX for a 60/40).

I think people are confusing EE and I bonds together. From Nov 2019 to April 2020 EE's are rated at 0.10% while I bonds are 2.22%

[Atomic]

iBonds are tax-deferred but can be withdrawn tax-free for educational purposes. We use the iBond as an emergency fund, fixed asset allocation and possible future college fund outside the 529.

This is great info, but looks like some income limits apply.

[brad.clarkston]

Shouldn't most people invest in the 10k ibond before putting money into taxable?

We have no iBonds. We have a Taxable account with 100% Total Stock fund. This works for us, do what works for you.

A post about bonds and you want to chime in on stocks?

[Unladen_Swallow]

Shouldn't most people invest in the 10k ibond before putting money into taxable?

We have no iBonds. We have a Taxable account with 100% Total Stock fund. This works for us, do what works for you.

A post about bonds and you want to chime in on stocks?

Someone has itchy fingers. A post about bonds, and you want to chime in on another poster's response about stocks on a post about bonds?

I had added a note to address fixed income as well. Both parts complete my response as I see fit. OP asked about investing in iBonds before taxable, and he got my answer both times.

[shess]

This is not a personal criticism of you, dbr, because many people write similar posts.

It constantly amazes me when posters complain about security measures protecting substantial assets.

The secret decoder ring ridicule in part led to Treasury Direct switching to less-secure email. The card is something you have. Your email credentials are simply a second thing you know. They downgraded from two-factor to one-factor authentication.

Having more security measures does not add security if they are not well thought out.

Honestly, you know what I want for my Treasury Direct account? I want to have an online component where I can easily check my balance, but where I have to go to my local bank to redeem the bonds. That way it's very convenient for me during the 20-30 years I'm holding the bond, with a little inconvenience when I want to turn the bonds into cash. That inconvenience is targeted specifically at the part that needs the security - I don't really _want_ random strangers to be able to check my balance, but that's less concerning than if they can make transactions!

That's almost the opposite of what we have now. When I login I have to use some random account number, then receive a passcode via email, then use a ON SCREEN KEYBOARD to type in my CASE INSENSITIVE PASSWORD, which lets me see the original and current balances for bonds I've enrolled in the system at a level of detail which would get people fired at an online brokerage. I mean, I appreciate running a slim operation, but 1995 called and wanted their page design and security practices back.

[smectym]

I've heard that I bonds can be a major pain in the butt to deal with, especially for heirs or surviving spouses. Ask yourself it's worth the trouble when you can get similar characteristics from TIPS.

Actually the reason we don't have any I bonds is to avoid having still another account, this time at Treasury Direct. We did open an account and had some I bonds, but about the time they sent out the little plastic decoder ring* to access your account I had had enough. We redeemed the bonds and got out of Dodge.

*They actually sent out a plastic card that had a code system for getting into your account. I'm sure that is long gone, but who needs the aggravation?

Yes, you can read about issues dealing with TD. Other people will say they have no problems and all is well. I suspect almost all the time all is well.

You get used to Treasury Direct, and I like it, but I don't disagree. The site is not real user friendly. It's not something grieving spouses or puzzled heirs would want to have to deal with.

[Phineas J. Whoopee]

I've heard that I bonds can be a major pain in the butt to deal with, especially for heirs or surviving spouses. Ask yourself it's worth the trouble when you can get similar characteristics from TIPS.

Actually the reason we don't have any I bonds is to avoid having still another account, this time at Treasury Direct. We did open an account and had some I bonds, but about the time they sent out the little plastic decoder ring* to access your account I had had enough. We redeemed the bonds and got out of Dodge.

*They actually sent out a plastic card that had a code system for getting into your account. I'm sure that is long gone, but who needs the aggravation?

Yes, you can read about issues dealing with TD. Other people will say they have no problems and all is well. I suspect almost all the time all is well.

You get used to Treasury Direct, and I like it, but I don't disagree. The site is not real user friendly. It's not something grieving spouses or puzzled heirs would want to have to deal with.

The important point is there's no reason they would have to, and every reason for them not to. Impersonating a deceased individual to initiate transactions is a very bad idea.

All they need is the fact you have an account there, your death certificate, your account number would probably ease the process, and an order from the probate court. They never have to, and shouldn't, log in as if they were you.

If they are co-owners or beneficiaries even less stringent conditions apply. They would need nothing more than what it takes to claim your transfer-on-death savings account, or your life insurance proceeds.

PJW

[LadyGeek]

I removed a few off-topic posts. As a reminder, see: General Etiquette

We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones.

[Mountain Doc]

I like the idea of I Bonds, but I decided they aren't worth it to me. I ran the numbers comparing two portfolios with the same stock/bond allocation, but one with stocks in taxable and one with I Bonds in taxable. It is impossible to know which will come out ahead (because it depends on unknowable factors - stock returns, bond returns, inflation, future tax rates), but with reasonable assumptions in my case the two portfolios were very close. Since I Bonds have annual purchase limits, I Bonds require another account, and it was a coin flip on outcomes anyway, I decided to just go with stocks in taxable. The potential benefits of I Bonds were just too small to mess with.

If I had the opportunity to buy I Bonds with real rates >1%, it might change my mind.

[mmmodem]

Same as above. TreasuryDirect is why I cannot recommend ibonds. My iBonds purchased a few years ago are locked so tightly in that website, I have no access to it. Sure, if there are no issues, the website works just fine. It worked fine for me until I lost the decoder card for DW and then I closed my bank account linked to TreasuryDirect. Now I have get a medallion guarantee and notarize or something. I can't access my account or DW's account. I can't figure it out while I am alive. I can't imagine what DW would have to do if I passed away. One of these days, I'll sit down and sort it out and liquidate my account. For now, I sure hope it's made a lot of deferred interest.

[LadyGeek]

The discussion is getting derailed on US Treasury site security. Please stay on-topic, which is:

I put some money into taxable each year after I max out 401k (no mega backdoor possible), backdoor Roth, and some money for 529.

However, I have been reading up on ibond, seems like a good choice for anyone who has bond allocation, CD and can invest in taxable. Yet I don't hear many people using that option, am I missing something? Shouldn't most people invest in the 10k ibond before putting money into taxable?

fcf18 - Has your question been answered?

[Northern Flicker]

iBonds essentially extend the amount of tax-qualified space you have, which is a good thing. However, I would not modify one’s asset allocation to take advantage of it. I would prefer stock index funds in taxable space, but if holding fixed income in taxable space, iBonds are a reasonable option if you would otherwise hold the asset as fixed income assets in taxable space.

[Buffetologist]

I used to buy Ibonds to hedge inflation, however, if one looks at the after tax value of the I-bond, if the face value tracks inflation, the actual return lags inflation significantly because of the tax that needs to be eventually paid.

Instead, to hedge inflation, I maintain an allocation in my 401K to Fidelity Spartan Inflation-Protected Idx (FIPDX). I only add to that position when the real-yields shown here https://www.treasury.gov/resource-cente ... =realyield for the 5 year bond are significantly positive to account for the expense ratio.

While this doesn't track inflation precisely, and short-term, the returns are subject to the bond market, it seems like a better hedge to me since retirement funds are eventually taxed on the whole balance. In other words assuming an eventual 25% tax rate, the value of $10,000 in a retirement account is really equivalent to $7500. If the account doubled, the after tax value would be $15000. So basically, compound interest applies equally to both the pre-tax and after tax amount equally.

I'd be interested in discussion on this approach.

[friar1610]

There are some posters here that wisely purchased ibonds back in 2007-2009 at a 4-6% rate (i.e., not counting the inflation component). Those are some ibonds that I would instantly buy $10k today from TreasuryDirect.

I believe the highest fixed rate was 3.6% back in 2000. I bought a bunch at 3.4% but am no longer buying any because of the current low interest rates. When will I surrender them? To paraphrase Charlston Heston, I'll give them up when you pry them from my cold, dead hands. (Or when they stop paying interest at the 30 year point).

[Iorek]

Count me as someone who doesn’t understand why, when OP says, (approximately) “for someone investing in CDs or bonds in taxable do i-bonds make sense” a bunch of people respond with suggestions to change the asset allocation to stocks.

Personally I buy i-bonds because I think the combination of tax deferral, liquidity, and inflation indexing is better than buying CDs. For myself, I don’t find the purchase limits or TD to be problems.

[david9117]

Ibonds are right now 0.2% and the 10yr TIPS is 0.05% and 20yr TIPS is 0.27%.

I have in my IPS to buy TIPS. Right now with the above rates the first stop for me is Ibonds. It is an entirely different discussion if TIPS should be or not be part of one portfolio. Given that I am buying TIPS, Ibonds is better.

Also for me buying TIPS in tax deferred accounts is a second priority since I have to account for state taxes (I am in CA) for withdrawals from tax deferred. About a ~10% haircut compared to Ibonds (which are state tax exempt).

[mathguy3021]

I like I bonds because the interest is not only tax deferred but NOT included in MAGI used in ACA subsidy calculations. This is the main advantage of I bonds over municipal bonds and dividend paying ETFs. If all your non retirement account funds were in I bonds, you could theoretically control your MAGI using Roth conversion income in early retirement. By the time my oldest I bonds matures, my income will be much lower, so the tax hit will be low.

[$musicman$]

We bought $60,000 of paper Ibonds in October of 2001.

3% fixed rate..and getting close to a “triple.”

[bhtomj]

Back to the original question...
I cannot say most investors should but I invest in I-bonds before taxable.

[$musicman$]

I've heard that I bonds can be a major pain in the butt to deal with, especially for heirs or surviving spouses. Ask yourself it's worth the trouble when you can get similar characteristics from TIPS.

Actually the reason we don't have any I bonds is to avoid having still another account, this time at Treasury Direct. We did open an account and had some I bonds, but about the time they sent out the little plastic decoder ring* to access your account I had had enough. We redeemed the bonds and got out of Dodge.

*They actually sent out a plastic card that had a code system for getting into your account. I'm sure that is long gone, but who needs the aggravation?

Yes, you can read about issues dealing with TD. Other people will say they have no problems and all is well. I suspect almost all the time all is well.

You get used to Treasury Direct, and I like it, but I don't disagree. The site is not real user friendly. It's not something grieving spouses or puzzled heirs would want to have to deal with.

Precisely why I dumped our electronic Ibonds. I don’t want my wife to have to deal with Treasury Direct.

The paper ones are great..drive to bank..sign bond..get cash.

[anon_investor]

I think they are a good option for a multi tier emergency fund. That’s about it.

+1. I am considering using some to replace some of the expiring CDs I use for my emergency fund, since current interest rates are lower than what I bonds offer. The no state income and tax deferred aspects are a bonus, probably would simplify things for me too, not having to worry about replacing expiring CDs. Call it market timing, but I doubt CD rates will skyrocket any time soon, so I bonds look attractive even with the 1 year holding period and 5 year holding period to avoid an interest penalty.

[fcf18]

The discussion is getting derailed on US Treasury site security. Please stay on-topic, which is:

I put some money into taxable each year after I max out 401k (no mega backdoor possible), backdoor Roth, and some money for 529.

However, I have been reading up on ibond, seems like a good choice for anyone who has bond allocation, CD and can invest in taxable. Yet I don't hear many people using that option, am I missing something? Shouldn't most people invest in the 10k ibond before putting money into taxable?

fcf18 - Has your question been answered?

yes, the question has definitely be answered. Thank you for everyone's input, I knew I would hear from some smarter people here.

[fcf18]

I think they are a good option for a multi tier emergency fund. That’s about it.

+1. I am considering using some to replace some of the expiring CDs I use for my emergency fund, since current interest rates are lower than what I bonds offer. The no state income and tax deferred aspects are a bonus, probably would simplify things for me too, not having to worry about replacing expiring CDs. Call it market timing, but I doubt CD rates will skyrocket any time soon, so I bonds look attractive even with the 1 year holding period and 5 year holding period to avoid an interest penalty.

yes, I am thinking of the same, I have one CD in a credit union on 1-year term for 12 years now
However, I do agree the current term really isn't that attractive, it would probably be better to just reduce the emergency fund to a lower amount than having a bunch of CDs that I haven't touched for 5+ years

[fcf18]

I put some money into taxable each year after I max out 401k (no mega backdoor possible), backdoor Roth, and some money for 529.

However, I have been reading up on ibond, seems like a good choice for anyone who has bond allocation, CD and can invest in taxable. Yet I don't hear many people using that option, am I missing something? Shouldn't most people invest in the 10k ibond before putting money into taxable?

I hold 30% of my FI in a combination of bank CD's/EE Bonds/I Bonds/Tbills (the other 10% is in FXNAX for a 60/40).

I think people are confusing EE and I bonds together. From Nov 2019 to April 2020 EE's are rated at 0.10% while I bonds are 2.22%

I never knew about EE bond before, but after looking it up, the rate seems completely insane and I couldn't understand why anyone would want to buy it today and lock in the 0.1% rate for 20+ years.

[anon_investor]

I put some money into taxable each year after I max out 401k (no mega backdoor possible), backdoor Roth, and some money for 529.

However, I have been reading up on ibond, seems like a good choice for anyone who has bond allocation, CD and can invest in taxable. Yet I don't hear many people using that option, am I missing something? Shouldn't most people invest in the 10k ibond before putting money into taxable?

I hold 30% of my FI in a combination of bank CD's/EE Bonds/I Bonds/Tbills (the other 10% is in FXNAX for a 60/40).

I think people are confusing EE and I bonds together. From Nov 2019 to April 2020 EE's are rated at 0.10% while I bonds are 2.22%

I never knew about EE bond before, but after looking it up, the rate seems completely insane and I couldn't understand why anyone would want to buy it today and lock in the 0.1% rate for 20+ years.

EE Bonds have one major benefit, right now if held for 20 years the value is guaranteed to double, which would give it an effective interest rate of 3.5% after 20 years.

[dbr]

In any case the definitive reply to the question asked is no, I bonds are not always better than other possible investments in a taxable account.

[anon_investor]

I think they are a good option for a multi tier emergency fund. That’s about it.

+1. I am considering using some to replace some of the expiring CDs I use for my emergency fund, since current interest rates are lower than what I bonds offer. The no state income and tax deferred aspects are a bonus, probably would simplify things for me too, not having to worry about replacing expiring CDs. Call it market timing, but I doubt CD rates will skyrocket any time soon, so I bonds look attractive even with the 1 year holding period and 5 year holding period to avoid an interest penalty.

yes, I am thinking of the same, I have one CD in a credit union on 1-year term for 12 years now
However, I do agree the current term really isn't that attractive, it would probably be better to just reduce the emergency fund to a lower amount than having a bunch of CDs that I haven't touched for 5+ years

Not sure how large of an emergency fund you are holding. Personally, I keep about 6 months of take home pay as an emergency fund (any excess fund are invested in a taxable account), but I am the sole breadwinner with a spouse and kids, so I would not feel comfortable with less. About 4 months take home pay is usually in CDs, the other 2 months are in savings accounts. As CDs expire, I might start shifting that portion to I Bonds (have to do it incrementally anyway because of the 1 year required holding period). At today's low interest rates I just do not see a better option, as nominal bonds that offer coupon rates anywhere close to I Bonds have either interest rate risk (from long duration) or credit risk.

[watchnerd]

I started reading seriously about ibonds only 1-2 days back after some threads here. The small amount you can deploy makes them not very attractive to me right now, but I do wish I had considered them in the past.

Ditto.

The annual purchase limit is too low.