I-Bonds in Taxable or Tax deferred account?

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goshenBogle
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I-Bonds in Taxable or Tax deferred account?

Post by goshenBogle »

High level summary of our financial position:
Retired in 70's
Portfolio = $5.7 million
Stock / bond / cash allocation (rounded) for entire portfolio = 47% / 52% / 1%
Taxable account = $3.7 million
Tax deferred account = $2 million
Total expenses for year including taxes approx. $60K
No debt

When we take our RMDs this year, we will maintain the above AA.

We are wondering if we should purchase I-bonds with some of the fuinds from the RMDs and place those I-bonds in our taxable account.

Thoughts and comments?
Retired and loving it!!!!
Bentonkb
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Re: I-Bonds in Taxable or Tax deferred account?

Post by Bentonkb »

I don't think you can put I-bonds in an IRA. They are a separate account for each social security number, one for you and one for your spouse.
Onlineid3089
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Re: I-Bonds in Taxable or Tax deferred account?

Post by Onlineid3089 »

I'm not sure I understand the question. If you are asking if they should be bought in taxable or tax advantaged, as stated above I am not sure it is even a choice.

If you are asking if that is how you should use some of your RMDs, do whatever makes you feel good. I would probably suggest that you find something that is meaningful to you to donate the excess RMDs to, it isn't like you need to be saving for a rainy day sitting at almost 100x expenses. That way you might see someone else benefit from all that work and saving that got you to where you are now.
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Mel Lindauer
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Re: I-Bonds in Taxable or Tax deferred account?

Post by Mel Lindauer »

Two things:
1. As has been pointed out, I Bonds cannot be placed in an IRA or other retirement account.
2. I Bonds are already tax-deferred for up to 30 years, so you're getting inflation protection AND tax-deferral with them.
Best Regards - Mel | | Semper Fi
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goshenBogle
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Re: I-Bonds in Taxable or Tax deferred account?

Post by goshenBogle »

I kinda scsrewed up with the title of my post. I did not mean to say in the title "tax deferred".

All I really want comments on is does it make sense for us to use soem of our RMDs to purchase TreasuryDirect I-bonds for our taxable account?

Sorry about my mistake. :(
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pasadena
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Re: I-Bonds in Taxable or Tax deferred account?

Post by pasadena »

goshenBogle wrote: Mon Sep 13, 2021 2:13 pm I kinda scsrewed up with the title of my post. I did not mean to say in the title "tax deferred".

All I really want comments on is does it make sense for us to use soem of our RMDs to purchase TreasuryDirect I-bonds for our taxable account?

Sorry about my mistake. :(
You can edit your post.

You can't put I-Bonds in your taxable account. You can only buy them in a TreasuryDirect account (or get paper ones).
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CyclingDuo
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Re: I-Bonds in Taxable or Tax deferred account?

Post by CyclingDuo »

goshenBogle wrote: Mon Sep 13, 2021 2:13 pm I kinda scsrewed up with the title of my post. I did not mean to say in the title "tax deferred".

All I really want comments on is does it make sense for us to use soem of our RMDs to purchase TreasuryDirect I-bonds for our taxable account?

Sorry about my mistake. :(
No worries. As mentioned above, you would create an account at Treasury Direct where you would be able to purchase up to your limit each year. Here is the link: https://www.treasurydirect.gov/tdhome.htm

These are not allowed to be purchased in your brokerage accounts (taxable or tax deferred). You can only purchase them and hold them at Treasury Direct.

CyclingDuo
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tj
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Re: I-Bonds in Taxable or Tax deferred account?

Post by tj »

pasadena wrote: Mon Sep 13, 2021 2:16 pm
goshenBogle wrote: Mon Sep 13, 2021 2:13 pm I kinda scsrewed up with the title of my post. I did not mean to say in the title "tax deferred".

All I really want comments on is does it make sense for us to use soem of our RMDs to purchase TreasuryDirect I-bonds for our taxable account?

Sorry about my mistake. :(
You can edit your post.

You can't put I-Bonds in your taxable account. You can only buy them in a TreasuryDirect account (or get paper ones).
You haven't been able to purchase paper ones for over a decade, only way to get paper is through income tax refund.
Broken Man 1999
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Re: I-Bonds in Taxable or Tax deferred account?

Post by Broken Man 1999 »

If you want to treat your I-bonds like a taxable holding, you can choose to pay taxes on the interest earned each year.

Me, I prefer to defer taxes on my I-bonds, though the taxable interest is accruing. It is a considerable amount I will have to address in 2030 and 2031, assuming I hold them for the full 30 years.

After a long period of time not buying I-bonds, I have started buying them again with my grandchildren as beneficiaries.

I-bonds are a unique product, very useful.

Broken Man 1999
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pasadena
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Re: I-Bonds in Taxable or Tax deferred account?

Post by pasadena »

tj wrote: Mon Sep 13, 2021 2:43 pm
pasadena wrote: Mon Sep 13, 2021 2:16 pm
goshenBogle wrote: Mon Sep 13, 2021 2:13 pm I kinda scsrewed up with the title of my post. I did not mean to say in the title "tax deferred".

All I really want comments on is does it make sense for us to use soem of our RMDs to purchase TreasuryDirect I-bonds for our taxable account?

Sorry about my mistake. :(
You can edit your post.

You can't put I-Bonds in your taxable account. You can only buy them in a TreasuryDirect account (or get paper ones).
You haven't been able to purchase paper ones for over a decade, only way to get paper is through income tax refund.
Yes, I know.
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SmileyFace
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Re: I-Bonds in Taxable or Tax deferred account?

Post by SmileyFace »

What are you trying to accomplish?
I like iBonds for tax deferred retirement savings and as additional emergency funds. Also - provides some inflation protection. Doesn't sound like you need any of these things so I am not sure why you would complicate your holdings with a Treasury Direct Account (especially since it would be such a tiny part of your portfolio at this point).
Last edited by SmileyFace on Mon Sep 13, 2021 2:59 pm, edited 1 time in total.
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GerryL
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Re: I-Bonds in Taxable or Tax deferred account?

Post by GerryL »

An aside. Has anyone looked at their I Bond interest rates lately?

I bought all mine around 20 years ago, back when they were being touted in the mainstream news as a great investment. I just happened to need a report yesterday for some record keeping. I was astounded to see that all of them are currently paying 7% interest. Holy Moly!

In about 10 years I'm going to be taking a tax hit with maturing bonds and growing RMDs. I may just have to accept paying some IRMAA'd Medicare premiums for a year or two. GPTH I guess.
z3r0c00l
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Re: I-Bonds in Taxable or Tax deferred account?

Post by z3r0c00l »

Retired in your 70s with a small fortune, I wouldn't bother with $10,000 a year at this point, just added complexity.
100% Global Stocks / Ibond Emergency Fund
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dratkinson
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Re: I-Bonds in Taxable or Tax deferred account?

Post by dratkinson »

Sounds like you're in the 12% fed tax bracket (MFJ, $60K expenses), and looking for ways to spend the excess money forced onto you by unwanted RMDs.


Idea: municipal bond fund.

Most recommend TBM in a low tax bracket. But for your case I'd opt for putting the money into a municipal bond fund. Why?
--Your tax bracket will increase with RMDs, if current tax code sunsets, and for a single filer.
--The fed tax bite is larger than the state tax bite, so a fed-tax benefit is better than a state-tax benefit.
--Savings bonds are fed taxed when redeemed, though state tax exempt.
--Municipal bond funds are fed tax exempt. And may be fed+state+city tax exempt with a single-state muni fund.

Advantage: muni fund.

Besides, savings bonds have annual contribution limits (too little to do you much good)... and you don't want to be messing with redeeming savings bonds when you’re 90-100 (=70+(20 or 30)). Munis avoid those problems.


Many recommend an IT (intermediate-term) national muni fund... like VWIUX, or MUB. But only in the 25%+ fed tax bracket.

But I prefer the greater reward/risk of a LT (long-term) national muni fund... like VWLUX. Why? It has a better chance of matching/surpassing TBM's after-tax income in a low tax bracket.

Disclosure. I pair VWLUX 50/50 with an acceptable single-state muni fund. (I have TLH'd the greater risk of both. It wasn't terrible.)

In the 12% fed tax bracket (your assumed case)...
--VBTLX SEC yield: 1.31%
--VWIUX SEC yield: 0.69% = 0.69 / (1-.12) = 0.78% taxable-equivalent yield
--MUB SEC yield: 0.78% = 0.78 / (.88) = 0.89% TEY
--VWLUX SEC yield: 1.11% = 1.11% / (.88) = 1.26% TEY

But if the current tax code sunsets and 12% returns to 15% fed tax bracket...
--VBTLX SEC yield: 1.31%
--VWIUX SEC yield: 0.69 = 0.69 / (1-.15) = 0.81% TEY
--MUB SEC yield: 0.78% = 0.78 / (.85) = 0.92% TEY
--VWLUX SEC yield: 1.11% = 1.11% / (.85) = 1.31% TEY

When your RMDs push you into a higher tax bracket, then the muni after-tax yield gets better. Ditto if the current tax code sunsets. Ditto for a single filer.

Plan for the worst, hope for the best. So by buying munis today, in the 12% tax bracket, you are setting yourself up to handle the tax consequences that are expected to come your way.

Besides, a dollar dividend from munis is better than a dollar dividend from savings bonds. Why? You can rebalance muni immediate dividends; you can't rebalance savings bonds deferred dollars.



Idea: Roth conversions.

You could use your excess money (RMDs+) to pay tax on Roth conversions, to reduce your tax-deferred balance and future RMDs/tax for a surviving spouse.

See: https://www.kitces.com/blog/tax-rate-eq ... nversions/

After you go through the exercise of determining your equilibrium tax rate, you may discover that you'll bump up several tax brackets with RMDs.

Bottom line. You may want to bump up 1-3 tax brackets now, before the tax code sunsets, to do Roth conversions, to lower your tax-deferred balance, to lower your RMDs, to make life easier for a surviving spouse.



Idea: Munis + Roth conversions.

Or you could do both.
--Put your RMDs into munis. (RMDs must come out first, based on Dec balance.)
--And do excess withdrawals to cover Roth conversion + tax on the RMD/conversion/excess withdrawal. (It'll lower your tax-deferred balance more.)

It's probably okay to bump up *TO* your equilibrium tax rate to do conversions, but no need to go over.



Idea. Bonds in tax-deferred.

If you convert your tax-deferred accounts to 100% bonds, it’ll slow tax-deferred growth and so reduce the total tax paid on a total conversion. (Assume bonds grow 2%/yr. You'd skew your other accounts to equities to maintain your AA.)



Student exercises.
--Determine your equilibrium tax rate. (How many tax brackets will a single-filer bump up? With RMDs? With tax code sunset?)
--Determine how much you can lower your tax-deferred balance/RMDs for a surviving spouse, by advancing tax bracket now, to do Roth conversions. (Assume future tax code will resemble today's, so your best guess today is good enough.)
--Run through the same exercise and assume your tax-deferred accounts are all bonds, and only growing at 2%/yr. You should find that you'll be able to finish conversions a little sooner, and for slightly less total tax cost.



Idea. Roth conversion spreadsheet. One may make your life easier, but no reason to reinvent the wheel.
--Search forum: https://www.google.com/search?q=roth+co ... rg%2Fforum
--Search internet: https://www.google.com/search?q=roth+co ... preadsheet



Plan for the worst. Hope for the best.



Edit. Second thoughts.
Last edited by dratkinson on Mon Sep 20, 2021 5:37 pm, edited 4 times in total.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.
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Mel Lindauer
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Re: I-Bonds in Taxable or Tax deferred account?

Post by Mel Lindauer »

GerryL wrote: Mon Sep 13, 2021 2:59 pm An aside. Has anyone looked at their I Bond interest rates lately?

I bought all mine around 20 years ago, back when they were being touted in the mainstream news as a great investment. I just happened to need a report yesterday for some record keeping. I was astounded to see that all of them are currently paying 7% interest. Holy Moly!

In about 10 years I'm going to be taking a tax hit with maturing bonds and growing RMDs. I may just have to accept paying some IRMAA'd Medicare premiums for a year or two. GPTH I guess.
You can avoid the big tax hit (or at least reduce it somewhat) by staggering your redemptions over several years, rather than redeeming them all in the year they mature. (I know, it's really hard to part with some of those good old high fixed rate I Bonds prior to maturity!)
Best Regards - Mel | | Semper Fi
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