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I-bonds? Yay or nay? Doing my taxes...
Old 02-15-2014, 12:56 PM   #1
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I-bonds? Yay or nay? Doing my taxes...

Hello wise folks.

We're getting a medium size refund (just over $1k). I'm debating getting cash or getting part of it in i-bonds.

Background: We have some tips mutual funds, short term bond mutal funds and total bond mutual funds... so I'm wondering if I bonds have some advantage over our current bond allocation.

But this would be pretty much insignificant in our asset allocation.

Other thoughts, please bear with me.
- We have pre-college age kids. I read that you can get a tax break if you redeem the bonds the same year you have qualified educational expenses. One kid is 5.5 years out from starting college, the other is 7.5 years out.
- We have a semi-scary family history with bonds...My MIL has been buying bonds in small denominations, through the years. She would lose the paper copies, she doesn't/didn't trust treasury direct, and she didn't keep good records of what she had. Now she has dementia and my husband is her guardian. She doesn't trust him, or anyone. She hides her bonds, then rediscovers them, then loses/hides them again. She showed the stack of bonds to my SIL who copied the numbers. They've subsequently disappeared again. DH contacted the treasury and got an overlapping list (based on SS#'s)... but we're still unraveling what bonds she has. It's been quite a project. So individual bonds carry a bit of emotional baggage for my husband....
- Thinking of getting small bonds ($100?) in the kids names - so they can see compounding, etc... and they could use the money for mad money when they go to college. Not sure if that would qualify for the tax advantage since we'll be paying for their college. Do they need to be in our name to get the tax break?

Current interest rate is 1.38% plus inflation. Not too great.


But - I read here on E-R that folks like the i-bonds and get them at tax time. I'm trying to decide whether it's worth it.

Give me your wisdom and opinions. Thanks.
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Old 02-15-2014, 01:05 PM   #2
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We built up a nice cushion in I-Bonds prior to ER, to spend down during the 55 - 59.5 period as needed. Each year that we sell some we are asked by TurboTax at tax time if the proceeds were used to fund education expenses.

Also, you can sell them in partial lots as low as $25, so you don't need to buy lots of small bonds. They have served us well.
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Old 02-15-2014, 01:29 PM   #3
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If you are looking to use the Ibonds for college and get the taxes waived, make sure they are issued in YOUR name, not the kids. There are rules about what constitutes a valid bond for the tax break.

We got quite a bit of Ibonds when we could buy them with our credit card and get points for that. It made them a bit more valuable to us because we got a flight or two with the points and still paid no interest, paying it off in full. We used that as our emergency fund, with the end goal of using it for the kids' education if no emergencies occurred before we accumulated more funds. Since there will still be 5 cumulative years of college to pay for after we retire, we should have no problem meeting the income limits for the deduction at that time.

I was making about 9% on the Ibonds at purchase, now down to 4-ish. Don't know that I would buy them now given today's rate. Re record keeping, you can download the Savings Bond Wizard from the bond website. You plug in the bonds you got and it keeps track of their value. I printed out a copy to keep at DH's office in case a fire takes out the home.
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Old 02-15-2014, 01:36 PM   #4
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I believe the educational deduction on accrued interest only applies if the purchaser is 24 or older. Since you will be paying tuition and fees, the ibond purchase should be in your name if you plan on cashing out the bonds for college tuition and fee expenses.

My DD starts college in the fall, and I've purchased the max amount of ibonds for the last couple of years with the intention of using the funds for college expenses. I over-withheld this past year so I could buy a few more with my tax refund.

Having little tolerance for principal risk on funds I need in 1 to 4 years, I look at the bonds as a favorable alternative to both CD's and mutual funds with the potential for price fluctuations. They carry a decent interest rate with an inflation protection component.

The case for ibonds as a college savings vehicle on your 5 to 11 year horizon isn't so compelling, but does serve as diversification for a 529 or other savings riding the waves of the markets.
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Old 02-15-2014, 01:38 PM   #5
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We built up a nice cushion in I-Bonds prior to ER, to spend down during the 55 - 59.5 period as needed.
That's our plan as well. In addition, I enjoy the tax-deferment on I-Bond interests since we are currently in a high tax bracket.

You can currently earn 1.38% plus inflation (tax-deferred), with virtually zero credit risk. You can redeem at any time after the first year for a small penalty, and any time after 5 years penalty-free. IMO, it beats many cash equivalent options out there.
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Old 02-15-2014, 01:49 PM   #6
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Thanks folks.

I had a longer talk with my husband - and he's against it. He's too traumatized by his mom's bond weirdness and doesn't want to track them. He argued that if we get the full cash refund it will buy 2-3 new windows (our current home improvement project.)

Maybe next year. (Unless I'm laid off and retired by then. Fingers crossed.)
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Old 02-15-2014, 02:02 PM   #7
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I have several thousand in savings bonds that I planned to cash in for Education tax break. Didn't work out. Son will only be enrolled one semester this year and next year he will turn 24. He won't qualify as a dependent. I also think I bumped up against the Social Security income ledge. I'm not sure, but I think the Savings Bonds income would have counted against the Social Security income test. A lot of rules to work through.
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Old 02-15-2014, 02:34 PM   #8
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For a thousand bucks, why bother?
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Old 02-15-2014, 03:15 PM   #9
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We built up a nice cushion in I-Bonds prior to ER, to spend down during the 55 - 59.5 period as needed.
"Unfortunately" we bought some of the 3+% + inflation bonds I-Bonds quite a few years ago intending to do much the same thing. Now they seem like such a good deal I probably won't be able to part with them as intended. "Thankfully," they stop paying interest in about 15 years and I'll have good reason to cash them in.
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Old 02-15-2014, 03:28 PM   #10
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"Unfortunately" we bought some of the 3+% + inflation bonds I-Bonds quite a few years ago intending to do much the same thing. Now they seem like such a good deal I probably won't be able to part with them as intended. "Thankfully," they stop paying interest in about 15 years and I'll have good reason to cash them in.
We are in a similar situation, so I know just what you mean. Since we plan to move to the UK in 2 years time I have been cashing in the bonds in my name rather than DW's since she will be in a much lower tax bracket, but now my only IBonds left are the high interest ones.
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Old 02-15-2014, 04:24 PM   #11
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Originally Posted by samclem View Post
"Unfortunately" we bought some of the 3+% + inflation bonds I-Bonds quite a few years ago intending to do much the same thing. Now they seem like such a good deal I probably won't be able to part with them as intended. "Thankfully," they stop paying interest in about 15 years and I'll have good reason to cash them in.
You'll have no choice then!
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Old 02-15-2014, 08:58 PM   #12
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Thanks folks.

I had a longer talk with my husband - and he's against it. He's too traumatized by his mom's bond weirdness and doesn't want to track them. He argued that if we get the full cash refund it will buy 2-3 new windows (our current home improvement project.)

Maybe next year. (Unless I'm laid off and retired by then. Fingers crossed.)
Rodi, if you ever decide to buy them and are purchasing less than $10k, skip the tax refund process and just buy them direct through Treasury Direct. They keep an accurate total of each bonds value updated monthly. Then you can deposit and withdraw directly through your bank electronically. I still pay my monthly bills by check and I have no problem/concern with TD. You definitely will not get rich on them, though. But I buy them yearly as counterbalance to my mutual fund purchases. I do not need a portfolio rebalancing system because I live off a pension, but whenever I invest monies half is drawn off the top to IBonds to keep me from being stupid and losing all my money in the stock market.
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Old 02-18-2014, 07:03 PM   #13
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You can currently earn 1.38% plus inflation (tax-deferred), with virtually zero credit risk.
Sorry, the deal is not quite that good. Through April 30, 2014 the composite rate is 1.38% which is based on a fixed rate of 0.20% plus the inflation adjustment.

Individual - I Savings Bonds Rates & Terms: Calculating Interest Rates on I Bonds

Though I certainly think Treasury Direct frequently lists the composite rate as though it was the fixed rate.
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Old 02-18-2014, 07:29 PM   #14
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Sorry, the deal is not quite that good. Through April 30, 2014 the composite rate is 1.38% which is based on a fixed rate of 0.20% plus the inflation adjustment.

Individual - I Savings Bonds Rates & Terms: Calculating Interest Rates on I Bonds

Though I certainly think Treasury Direct frequently lists the composite rate as though it was the fixed rate.
You are correct, my bad.
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