To i-bond or not to i-bond

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
justsomeguy2018
Posts: 1495
Joined: Wed Oct 03, 2018 8:11 pm

To i-bond or not to i-bond

Post by justsomeguy2018 »

Right now I think you can get ~4.25% in a good MM fund.

I-bonds will pay ~6.48% for 6 months but if inflation gets tamed, then what?

There is the advantage of a 0.4% fixed rate on these i-bonds.

I have about $49k in i-Bonds as of right now.

Should I get $20k more or keep in MM fund?
Last edited by justsomeguy2018 on Mon Jan 23, 2023 7:53 pm, edited 1 time in total.
User avatar
nps
Posts: 1326
Joined: Thu Dec 04, 2014 10:18 am

Re: To i-bond or not to i-bond

Post by nps »

The fixed rate is 0.4%
CC1E
Posts: 130
Joined: Tue Aug 22, 2017 7:45 pm

Re: To i-bond or not to i-bond

Post by CC1E »

It’s a tough call because of the use-it-or-lose-it annual purchase limits. My feeling is that $20k isn’t a significant amount of money each year and I can cash it out if I need it, so I’ll continue buying. Hopefully it pays off the next time inflation spikes. I won’t bother with $5k from tax refund since it’s a hassle to convert the paper bonds.

I am going to wait until after the next reset in hopes that the fixed rate increases to compensate for the lower variable rate.
Triple digit golfer
Posts: 10054
Joined: Mon May 18, 2009 5:57 pm

Re: To i-bond or not to i-bond

Post by Triple digit golfer »

I'm going with money market mutual fund. I figure unless the I Bond is a clear winner, it isn't worth it for me. Note that I said for me. Everybody's circumstances are not the same. There are benefits to I Bonds that may sway you toward purchasing.
hoofaman
Posts: 641
Joined: Tue Jul 14, 2020 3:39 pm

Re: To i-bond or not to i-bond

Post by hoofaman »

The MM fund will pay whatever the short term rate happens to be, no one knows what it will be over the next 30 years.

With I-bond purchase, you get 0.4% fixed rate + the inflation rate, for 30 years. Also the earnings are tax deferred.

It seems like a long shot to bet that MM fund will return more over the next 30 years
Tom_T
Posts: 3195
Joined: Wed Aug 29, 2007 2:33 pm

Re: To i-bond or not to i-bond

Post by Tom_T »

justsomeguy2018 wrote: Mon Jan 23, 2023 7:46 pm Right now I think you can get ~4.25% in a good MM fund.

I-bonds will pay ~6.48% for 6 months but if inflation gets tamed, then what?

There is the advantage of a 0.4% fixed rate on these i-bonds.

I have about $49k in i-Bonds as of right now.

Should I get $20k more or keep in MM fund?
If inflation gets tamed, your MM fund's rate will likely start to go down, maybe very quickly. Luckily with I Bonds, we will know the new variable rate, at least, in advance, so there's time to consider it. Fixed rate is up in the air, but there is one opinion that it corresponds fairly well to the real return on 10-year TIPS.
lakpr
Posts: 9280
Joined: Fri Mar 18, 2011 9:59 am

Re: To i-bond or not to i-bond

Post by lakpr »

I would say get the $20k in I-bonds now. If the composite rate really goes down, you can sell them after 1 year. Given that we are assuming the composite rate WILL go down, the 3-month interest penalty shouldn't hurt.

If the inflation does get tamed, I think the short-term interest rates will go down, and so do the Money-Market Funds yield. I doubt that you would win with keeping the $20k in MMF. Even in the short-term (assuming such short term is > 1 year), I bonds could be better.
Triple digit golfer
Posts: 10054
Joined: Mon May 18, 2009 5:57 pm

Re: To i-bond or not to i-bond

Post by Triple digit golfer »

hoofaman wrote: Mon Jan 23, 2023 8:02 pm The MM fund will pay whatever the short term rate happens to be, no one knows what it will be over the next 30 years.

With I-bond purchase, you get 0.4% fixed rate + the inflation rate, for 30 years. Also the earnings are tax deferred.

It seems like a long shot to bet that MM fund will return more over the next 30 years
Why is it a long shot?

Earnings being tax deferred is a very small benefit. Zero or very low real return is not a lot of earnings and therefore not a lot of tax.
Grt2bOutdoors
Posts: 25063
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: To i-bond or not to i-bond

Post by Grt2bOutdoors »

If you have a short term need for the money, less than 1 year, then the MM fund wins.

You need the money between 2-5 years, buy the 2,3 or 5 year Treasury notes. As luck would have it, the next auctions for those are coming up in the next few days.

If you can hold for 5 years, the I bond might beat the money market fund. It’s a toss-up if it beats the treasury notes with a known fixed rate today.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
steadyosmosis
Posts: 82
Joined: Mon Dec 26, 2022 12:45 pm

Re: To i-bond or not to i-bond

Post by steadyosmosis »

More I-bonds for me, and this week, so that the $10k becomes liquid again in ~11 months.
I-bonds are additional tax-deferred space for me.
DuneArchitect
Posts: 2
Joined: Wed Apr 13, 2022 6:42 pm

Re: To i-bond or not to i-bond

Post by DuneArchitect »

Am I missing something here? I thought I-Bonds are capped at $10,000 per year per individual, why are people saying $20,000? Are you included spouse?

(I'm aware of the $5K paper bond option)
lakpr
Posts: 9280
Joined: Fri Mar 18, 2011 9:59 am

Re: To i-bond or not to i-bond

Post by lakpr »

DuneArchitect wrote: Mon Jan 23, 2023 8:13 pm Am I missing something here? No I thought I-Bonds are capped at $10,000 per year per individual, they are why are people saying $20,000? Are you included spouse? Yes, for two

(I'm aware of the $5K paper bond option)
I am not the person who mentioned $20k, but just thought I'd answer
staninco
Posts: 12
Joined: Tue Oct 02, 2007 3:31 pm

Re: To i-bond or not to i-bond

Post by staninco »

Also available if one has a Trust - another 10k! Read up for details...
hoofaman
Posts: 641
Joined: Tue Jul 14, 2020 3:39 pm

Re: To i-bond or not to i-bond

Post by hoofaman »

Triple digit golfer wrote: Mon Jan 23, 2023 8:08 pm
hoofaman wrote: Mon Jan 23, 2023 8:02 pm The MM fund will pay whatever the short term rate happens to be, no one knows what it will be over the next 30 years.

With I-bond purchase, you get 0.4% fixed rate + the inflation rate, for 30 years. Also the earnings are tax deferred.

It seems like a long shot to bet that MM fund will return more over the next 30 years
Why is it a long shot?

Earnings being tax deferred is a very small benefit. Zero or very low real return is not a lot of earnings and therefore not a lot of tax.
You get taxed on nominal returns
iCare
Posts: 50
Joined: Sat Dec 18, 2021 9:08 am

Re: To i-bond or not to i-bond

Post by iCare »

I looked at returns of MM funds, last 3 year, 5 year, 10 year, all well below inflation. Why would it get any better?
I think - iBonds beat all bond funds - including bond funds over these periods.
VikingThor
Posts: 38
Joined: Thu Jan 30, 2020 11:11 pm

Re: To i-bond or not to i-bond

Post by VikingThor »

Triple digit golfer wrote: Mon Jan 23, 2023 8:08 pm
hoofaman wrote: Mon Jan 23, 2023 8:02 pm The MM fund will pay whatever the short term rate happens to be, no one knows what it will be over the next 30 years.

With I-bond purchase, you get 0.4% fixed rate + the inflation rate, for 30 years. Also the earnings are tax deferred.

It seems like a long shot to bet that MM fund will return more over the next 30 years
Why is it a long shot?

Earnings being tax deferred is a very small benefit. Zero or very low real return is not a lot of earnings and therefore not a lot of tax.
Tax benefit is enormous for some people if they hold for a very long time. State plus Federal tax can easily be 30% per year taken out of the MM fund gains, hampering growth.

No state tax at all on ibonds and deferring fed tax to the end is better. Also by deferring and planning when to cash out you can also potentially be in a lower bracket or even 0% tax. Plus the rate itself for I bonds is typically better than a MM fund.

Ie Purchasing ibond when in a high tax bracket for many years and cashing out in a year when unemployed or retired and low income.
flyingcows
Posts: 537
Joined: Sat Apr 20, 2019 8:13 am

Re: To i-bond or not to i-bond

Post by flyingcows »

I'm curious as I would have assumed I-bonds would come out ahead by a large margin long term. Of course we can't predict the future but what does the data tell us so far? How have I bonds vs MM fared over the past 5,10,20 years?
This content is for entertainment purposes only
fundseeker
Posts: 1006
Joined: Mon Dec 24, 2007 9:02 am

Re: To i-bond or not to i-bond

Post by fundseeker »

Keep it in the money market until mid April and then decide. We'll all have a better idea then about the expected new rate for May 1.
Makefile
Posts: 2394
Joined: Fri Apr 22, 2016 11:03 pm

Re: To i-bond or not to i-bond

Post by Makefile »

flyingcows wrote: Mon Jan 23, 2023 8:43 pm I'm curious as I would have assumed I-bonds would come out ahead by a large margin long term. Of course we can't predict the future but what does the data tell us so far? How have I bonds vs MM fared over the past 5,10,20 years?
It's hard to do 20 year comparisons because of the enormous fixed rates on Series I bonds in the early years, such that their 20-year returns are stock-like.
khodge
Posts: 15
Joined: Thu Oct 27, 2022 11:18 am

Re: To i-bond or not to i-bond

Post by khodge »

Here’s my strategy for this year. Instead of I Bond purchases before and after May 1, I think it makes more sense to buy Gift I Bonds (with one’s spouse), after the April 12th CPI Report (when we’ll know the full inflation rate). This will capture the 0.4% Fixed Rate of the current I Bond to be held undelivered in the Gift Box without using up any of the annual limit.

If it turns out that the May 1 Composite rate includes a higher Fixed Rate than 0.4%, both spouses can then also purchase new I Bonds to max out the annual limit.

If it turns out that the May 1 Composite Rate includes a lower or 0% Fixed Rate, both spouses can deliver previously purchased I Bonds with a 0% Fixed Rate that may be currently held in their respective Gift Boxes, and hold off on new purchases.
Topic Author
justsomeguy2018
Posts: 1495
Joined: Wed Oct 03, 2018 8:11 pm

Re: To i-bond or not to i-bond

Post by justsomeguy2018 »

fundseeker wrote: Mon Jan 23, 2023 8:52 pm Keep it in the money market until mid April and then decide. We'll all have a better idea then about the expected new rate for May 1.

I just want to confirm - regardless if I buy in April or January, I will still get6-months of interest for this period? It isn't pro-rated if I buy in April? Or is it?

Is there any other downside to waiting to buy?
123
Posts: 9274
Joined: Fri Oct 12, 2012 3:55 pm

Re: To i-bond or not to i-bond

Post by 123 »

I-bonds do seem like a good deal but I've come to the conclusion that the website and procedures are way beyond the comfort level of they that would be my surviving spouse so we'll be cashing out our i-bond holdings when we reach the 1 year anniversary of the most recent purchases.
The closest helping hand is at the end of your own arm.
Triple digit golfer
Posts: 10054
Joined: Mon May 18, 2009 5:57 pm

Re: To i-bond or not to i-bond

Post by Triple digit golfer »

justsomeguy2018 wrote: Mon Jan 23, 2023 11:04 pm
fundseeker wrote: Mon Jan 23, 2023 8:52 pm Keep it in the money market until mid April and then decide. We'll all have a better idea then about the expected new rate for May 1.

I just want to confirm - regardless if I buy in April or January, I will still get6-months of interest for this period? It isn't pro-rated if I buy in April? Or is it?

Is there any other downside to waiting to buy?
Rates change every May and November. If you buy in April, you'll get the current rate (November 2022) for six months. If you buy now you'll also get that rate for six months. If you buy in May or July, you'll get the May 2023 rate for six months. And so on.
dcabler
Posts: 2893
Joined: Wed Feb 19, 2014 11:30 am
Location: Austin, TX

Re: To i-bond or not to i-bond

Post by dcabler »

This is the 7th year for us to purchase Series I bonds. $10K each + $5K via tax return. Only wish I hadn't ignored them for all those years and had started earlier. Oh well...

Plan is to hold each to maturity with the plan to purchase another $25K in 2024 and 2025 and that'll likely be it. We'll have them maturing each year starting at age 86 through age 94 at that point. We'll of course continue to monitor the fixed rate to see if it ever makes sense to redeem any before maturity and purchase replacements, but it won't be a disaster if we never do that.

Will it move the needle a lot? Probably not. "Just another brick in the wall"

Cheers
coachd50
Posts: 1128
Joined: Sun Oct 22, 2017 10:12 am

Re: To i-bond or not to i-bond

Post by coachd50 »

VikingThor wrote: Mon Jan 23, 2023 8:28 pm
Triple digit golfer wrote: Mon Jan 23, 2023 8:08 pm
hoofaman wrote: Mon Jan 23, 2023 8:02 pm The MM fund will pay whatever the short term rate happens to be, no one knows what it will be over the next 30 years.

With I-bond purchase, you get 0.4% fixed rate + the inflation rate, for 30 years. Also the earnings are tax deferred.

It seems like a long shot to bet that MM fund will return more over the next 30 years
Why is it a long shot?

Earnings being tax deferred is a very small benefit. Zero or very low real return is not a lot of earnings and therefore not a lot of tax.
Tax benefit is enormous for some people if they hold for a very long time. State plus Federal tax can easily be 30% per year taken out of the MM fund gains, hampering growth.

No state tax at all on ibonds and deferring fed tax to the end is better. Also by deferring and planning when to cash out you can also potentially be in a lower bracket or even 0% tax. Plus the rate itself for I bonds is typically better than a MM fund.

Ie Purchasing ibond when in a high tax bracket for many years and cashing out in a year when unemployed or retired and low income.
The advantage of being “tax deferred” has been brought up several times in various threads on this same topic. But no one making that point has ever directly addressed the counter point that given low or 0% fixed rates (such as the current environment) the amount of income being deferred could be quite small for many years

https://www.treasurydirect.gov/files/sa ... -chart.pdf

Note the interest earned on Bonds purchased in 2012. Take away the recent few periods of higher inflation, and the deferred income would be about $200 -$300 a year. For someone presently in the 22% bracket but retiring in the 12% bracket - that is a savings of $20-30 bucks?
ramram22
Posts: 83
Joined: Sun Aug 29, 2021 3:57 am

Re: To i-bond or not to i-bond

Post by ramram22 »

coachd50 wrote: Tue Jan 24, 2023 6:19 am
VikingThor wrote: Mon Jan 23, 2023 8:28 pm
Triple digit golfer wrote: Mon Jan 23, 2023 8:08 pm
hoofaman wrote: Mon Jan 23, 2023 8:02 pm The MM fund will pay whatever the short term rate happens to be, no one knows what it will be over the next 30 years.

With I-bond purchase, you get 0.4% fixed rate + the inflation rate, for 30 years. Also the earnings are tax deferred.

It seems like a long shot to bet that MM fund will return more over the next 30 years
Why is it a long shot?

Earnings being tax deferred is a very small benefit. Zero or very low real return is not a lot of earnings and therefore not a lot of tax.
Tax benefit is enormous for some people if they hold for a very long time. State plus Federal tax can easily be 30% per year taken out of the MM fund gains, hampering growth.

No state tax at all on ibonds and deferring fed tax to the end is better. Also by deferring and planning when to cash out you can also potentially be in a lower bracket or even 0% tax. Plus the rate itself for I bonds is typically better than a MM fund.

Ie Purchasing ibond when in a high tax bracket for many years and cashing out in a year when unemployed or retired and low income.
The advantage of being “tax deferred” has been brought up several times in various threads on this same topic. But no one making that point has ever directly addressed the counter point that given low or 0% fixed rates (such as the current environment) the amount of income being deferred could be quite small for many years

https://www.treasurydirect.gov/files/sa ... -chart.pdf

Note the interest earned on Bonds purchased in 2012. Take away the recent few periods of higher inflation, and the deferred income would be about $200 -$300 a year. For someone presently in the 22% bracket but retiring in the 12% bracket - that is a savings of $20-30 bucks?
The tax deferral, like all of the I bond benefits, becomes significant if you don’t limit yourself to the $10,000 figure. Using a business and multiple trusts, I purchased $100,000 of I bonds last year and earned over $7,000 in interest income that is now being deferred – that is more than I could put into an IRA.

I want perfect safety from my fixed-income investments, and as last year showed, BND fails in that regard. Also, TIPS are not even remotely as attractive as I bonds, IMO – I’m not going to take on all that interest rate risk for an extra one point of yield. If I want a higher return, I’ll just buy stocks and get 6.5% real.

I bonds are so beautiful that I want to write sonnets about them. Actually, one could argue that the perfect, two-fund portfolio is just I bonds and VOO, and in fact, that is basically the Warren Buffett portfolio.
z3r0c00l
Posts: 3365
Joined: Fri Jul 06, 2012 11:43 am
Location: NYC

Re: To i-bond or not to i-bond

Post by z3r0c00l »

Just brewed a big cup of WFH coffee and scheduled my annual $10,000 purchase. If 2022 didn't convince you to build significant inflation protection of some kind into your investments, then nothing will.
70% Global Stocks / 25% Bonds / 5% cash
coachd50
Posts: 1128
Joined: Sun Oct 22, 2017 10:12 am

Re: To i-bond or not to i-bond

Post by coachd50 »

ramram22 wrote: Tue Jan 24, 2023 7:12 am
coachd50 wrote: Tue Jan 24, 2023 6:19 am
VikingThor wrote: Mon Jan 23, 2023 8:28 pm
Triple digit golfer wrote: Mon Jan 23, 2023 8:08 pm
hoofaman wrote: Mon Jan 23, 2023 8:02 pm The MM fund will pay whatever the short term rate happens to be, no one knows what it will be over the next 30 years.

With I-bond purchase, you get 0.4% fixed rate + the inflation rate, for 30 years. Also the earnings are tax deferred.

It seems like a long shot to bet that MM fund will return more over the next 30 years
Why is it a long shot?

Earnings being tax deferred is a very small benefit. Zero or very low real return is not a lot of earnings and therefore not a lot of tax.
Tax benefit is enormous for some people if they hold for a very long time. State plus Federal tax can easily be 30% per year taken out of the MM fund gains, hampering growth.

No state tax at all on ibonds and deferring fed tax to the end is better. Also by deferring and planning when to cash out you can also potentially be in a lower bracket or even 0% tax. Plus the rate itself for I bonds is typically better than a MM fund.

Ie Purchasing ibond when in a high tax bracket for many years and cashing out in a year when unemployed or retired and low income.
The advantage of being “tax deferred” has been brought up several times in various threads on this same topic. But no one making that point has ever directly addressed the counter point that given low or 0% fixed rates (such as the current environment) the amount of income being deferred could be quite small for many years

https://www.treasurydirect.gov/files/sa ... -chart.pdf

Note the interest earned on Bonds purchased in 2012. Take away the recent few periods of higher inflation, and the deferred income would be about $200 -$300 a year. For someone presently in the 22% bracket but retiring in the 12% bracket - that is a savings of $20-30 bucks?
The tax deferral, like all of the I bond benefits, becomes significant if you don’t limit yourself to the $10,000 figure. Using a business and multiple trusts, I purchased $100,000 of I bonds last year and earned over $7,000 in interest income that is now being deferred – that is more than I could put into an IRA.
Yes- and next year that $107,000 might provide $1,000 of interest- and a tax savings of $100 (if the difference between current tax rate and tax rate when you redeem is 10%).

And keep in mind that the average person probably doesn’t have the means to purchase $100,000 in one year. Along those lines, does the savings of $700 in taxes ( assuming same ten percent gap) really amount to much for a person who apparently has the means to purchase $100,000 in I bonds in a year?

The other aspects you mention are true.

None of what I say means that I bonds are not a good choice for some people. In fact, I think for someone saving for something in the future- they may be a great choice (they are labeled savings bonds after all).
Last edited by coachd50 on Tue Jan 24, 2023 8:20 am, edited 1 time in total.
rantk81
Posts: 343
Joined: Tue Apr 18, 2017 8:12 am

Re: To i-bond or not to i-bond

Post by rantk81 »

My thoughts - Which probably differ other people's thoughts :)

A) If $10K is a lot of money to you, then having it inaccessible for 12 months is probably a reason to avoid I-Bonds
B) If $10K is not a lot of money to you, then the hassle of having to deal with TreasuryDirect's website, possible medallion signatures, possibly of it getting lost upon death, etc -- is probably a reason to avoid I-Bonds.

And in both cases, when the interest rate adjusts this spring, it is likely to be less than what T-Bills and money market funds are paying anyway.

Finally, if you are considering jumping through a bunch of hoops, like setting up "gift ladders" or creating a bunch of trusts to exceed the annual I-Bond limits -- for most people, you'd probably get a higher ROI in your time by chasing bank/cc sign-up bonuses.
Last edited by rantk81 on Tue Jan 24, 2023 7:46 am, edited 1 time in total.
evelynmanley
Posts: 647
Joined: Tue Sep 21, 2010 9:13 am

Re: To i-bond or not to i-bond

Post by evelynmanley »

DuneArchitect wrote: Mon Jan 23, 2023 8:13 pm Am I missing something here? I thought I-Bonds are capped at $10,000 per year per individual, why are people saying $20,000? Are you included spouse?

(I'm aware of the $5K paper bond option)
It's possible to buy much more than $20k/year:

[Harry Sit's I-Bond archive: Harry Sit's I-Bond archives: https://thefinancebuff.com/tag/i-bonds]

https://thefinancebuff.com/how-to-buy-i-bonds.html

<<When you buy on the government website TreasuryDirect.gov, the limit is $10,000 each calendar year per Social Security Number as the primary owner in a personal account. When you buy using money from your tax refund, the limit is $5,000 per tax return (not per person when you file jointly).

If you have a trust, you’re allowed to buy another $10,000 each calendar year in a trust account. See Buy More I Bonds in a Revocable Living Trust.

If you have a business, the business can also buy $10,000 each calendar year. See Buy I Bonds for Your Business: Sole Proprietorship, LLC, S-Corp.

If you have kids under 18, you can also buy $10,000 each calendar year in each of your kids’ names. See Buy I Bonds in Your Kid’s Name.

If you’d like to buy I Bonds as gifts to others, see Buy I Bonds as a Gift.

A married couple each with a trust and a self-employment business can buy up to $65,000 each calendar year, and more if they file separate tax returns, buy in their kids’ names, or buy as gifts for family members.

$10,000 in Person A’s personal account with Person B as the second owner
$10,000 in Person B’s personal account with Person A as the second owner
$10,000 in an account for Person A’s trust
$10,000 in an account for Person B’s trust
$10,000 in an account for Person A’s business
$10,000 in an account for Person B’s business
$5,000 using money from their tax refund if they file jointly (or $5,000 each if they file separately after making sure they won’t lose other tax benefits)
$10,000 in the name of each of their kids under 18
$10,000 as a gift for each member of the extended family

We had only one trust before. We created a second trust with software to buy another $10,000. For buying I Bonds in a trust account in general, please read Buy More I Bonds in a Revocable Living Trust.<<
dbr
Posts: 43732
Joined: Sun Mar 04, 2007 9:50 am

Re: To i-bond or not to i-bond

Post by dbr »

I bonds are well configured for long term investing, so the question is what is one's long term asset allocation plan. It is a question of how much you want to accumulate in this particular investment in your taxable account* compared to alternatives in taxable, tax deferred, and tax exempt investments in stocks, bonds, TIPS, and other options. On the face of it there is a legitimate opportunity to build up this asset, but you still have to have a plan that makes sense. The single closest related alternative is TIPS but those probably in a tax deferred account. The difference is in whether or not to prefer longer duration inflation indexed fixed income similar to nominal bonds relative to short bonds or cash accounts. Questions of available taxable and tax protected investment space are also relevant.

*While the earnings are tax deferred for 30 years the money invested is after tax, similar to a Roth, rather than tax deferred pre-tax money in a 401k or IRA. This may be important or not matter depending on the investor and how much is being placed where.
texasfight
Posts: 303
Joined: Mon Jul 27, 2020 3:12 pm

Re: To i-bond or not to i-bond

Post by texasfight »

not buying ibonds here

this forum has always been very conservative when it comes to future returns for planning. Very common for people to say 0% real return for bonds and 3% real return for equities

I think reals are attractive here and so I am willing to take some duration risk to lock it in
Post Reply