Tips vs. I bonds
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KB
Thinks s/he gets paid by the post
I posted the same question about a month ago. I was just trying to remember what the answers were, I'll try a search and see if we can link to that thread.
As I understand it, TIPS yield more, but I bonds allow you to defer paying tax on the inflation adjust portion for a number of years. TIPS are better for IRAs because they yield more, and I bonds are sometimes better for taxable accounts. It depends upon your tax situation. You would have to run the tax numbers for your situation to figure out which is best.
P
Paul
Guest
Follow this link: http://www.coffeehouseinvestor.com/IIBonds.htm
The Coffeehouse link is a good one, but slightly dated. I believe the duration of TIPs is now 5, 10 and 20 years. And I bond can't be redeemed (with penalty) for 12 months instead of the 6 months in the article. Also a single person can purchase $30,000 a year at the bank and another $30k on line a year.
D
Dagny Taggart
Guest
The only problem with IBonds is with the current low real return of 1% you may end up losing money after inflation after you pay taxes on them.
-Dagny
-Dagny
KB
Thinks s/he gets paid by the post
Effective today, the rate is 3.67 for I bonds.
D
Dagny Taggart
Guest
Since IBonds are taxed at ordinary tax rates, if you are in a high tax bracket at retirement you may end up without an after tax real return with such low rates.
cute fuzzy bunny
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I wouldnt touch an ibond for less than 1.5% over CPI, maybe 2%. 3-3.5% for tips.
About the only application I can think of where I'd go into ibonds is to put college money away for my kid, because if you spend the money on education, gains are tax free.
I'm more likely to just keep on with the plan I have and take his college money (if he goes) out of my main investing bucket.
About the only application I can think of where I'd go into ibonds is to put college money away for my kid, because if you spend the money on education, gains are tax free.
I'm more likely to just keep on with the plan I have and take his college money (if he goes) out of my main investing bucket.
With due respect, TH, where would you place new money for the fixed income portion of your asset allocation (assuming you use this to balance your portfolio). Would you keep money in shorter term bonds or Cd's awaiting higher interest rates? Right now I-bonds seem quite competative with 5 year treasuries, shorter term bond funds, and CD's plus an early cash out option after 12 months. Longer term TIPS comparable to similar term bonds and bond funds.
[quote Right now I-bonds seem quite competative with 5 year treasuries, shorter term bond funds, and CD's plus an early cash out option after 12 months. .[/quote]
I see I bonds the same way. The yield is fairly good, as secure as you can find and if interest rates move upward and your I bond is no longer most benefical to you, cash out.
I see I bonds the same way. The yield is fairly good, as secure as you can find and if interest rates move upward and your I bond is no longer most benefical to you, cash out.
cute fuzzy bunny
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I dont really want my money locked up for 12 months, or to lose 3 months of interest within 5 years.
3.39% 'sort of real' when I can get 3% on 11 month cd's that can be cashed with only a 1 month penalty...3% completely tax free in ca IT muni's...or 4% in mixed IT bonds, which are effectively tax free since I dont pay any income tax right now.
Ibonds will be great if inflation ever takes off. Right now and for a little while, I'm betting we dont see anything much higher than what we've got.
Not saying ibonds are evil or arent worth having, my preference is to wait until the coupon goes higher or I start smelling inflation.
3.39% 'sort of real' when I can get 3% on 11 month cd's that can be cashed with only a 1 month penalty...3% completely tax free in ca IT muni's...or 4% in mixed IT bonds, which are effectively tax free since I dont pay any income tax right now.
Ibonds will be great if inflation ever takes off. Right now and for a little while, I'm betting we dont see anything much higher than what we've got.
Not saying ibonds are evil or arent worth having, my preference is to wait until the coupon goes higher or I start smelling inflation.
Might just be haggling over a few details and personal estimates of the future, but I would add that I bond return is now 3.67, which is higher than 4 year return on ING CD's. The TIPS vangard bond fund has a YTD return about the same as the Vangard long term index fund at 7.17% with several years less average maturity. I'm certainly not whole hog on either, but think they do have a place as a hedge against inflation, a few tax advantages, and the security of government issues. I would like to have a place to get 3% on 11 month CD's and one month penalty. My local banks are far less.
DCU offers just that. Go to their website to join their credit union . Just one hitch, you need to have direct deposit of $500 a month into the checking account. I just open my account and I will set up ING to transfer the money in and then promply transfer it back. If you are not interested in doing that the interest rate drops by a .25%.
http://www.dcu.org/index.html
Although, I don't have an account with this one, you can try this bank for 2.75% checking account.
http://www.presidential.com/
Good luck
cute fuzzy bunny
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
DCU is where I get my CD's as well. Been banking with them since the old Digital Equipment Corporation whipped them up as a captive credit union around 1980. The credit union outlived the company...if you snoop through the application section you'll see that they have a form that lets you join one of several "groups" for about $10-20 that qualifies you for lifetime membership in the CU. You can even apply for group membership and credit union accounts on the same form. The ten bucks is a one time thing.
That they've gone 24 years giving me good service and never once doing anything to tick me off and make me want to go somewhere else is nothing short of amazing.
The capital gains in the vanguard tips fund are in part from the rush to one of the latest new asset classes. With interest rates rising someday, perhaps without any significant associated cpi measure inflation increases, you could see a drop in navs if newer tips are available with coupons higher than 2.5%.
In any case, the yield on that is 1.42% and you're going to get whacked a little on taxable gains at the end of the year on your 1099 as you have to pay taxes on the inflation adjustment annually for all the tips the fund holds. My bet is the paltry 1.42% yield will just about cover the taxes.
Considering I like to drain the dividends and interest (because theoretically I'm paying taxes on them already) and leave the principal intact...I dont care much for the tips fund...especially in a taxable account.
For what its worth, I do have a very small percentage of my assets in the vanguard tips fund in a Roth I started last year.
As far as holding tips or any other bonds in a retirement account...except for that small Roth my IRA is 100% equity. Unless you're less than 10 years away from tapping it, I'm not sure why you'd hold a lot of bonds in an IRA.
That they've gone 24 years giving me good service and never once doing anything to tick me off and make me want to go somewhere else is nothing short of amazing.
The capital gains in the vanguard tips fund are in part from the rush to one of the latest new asset classes. With interest rates rising someday, perhaps without any significant associated cpi measure inflation increases, you could see a drop in navs if newer tips are available with coupons higher than 2.5%.
In any case, the yield on that is 1.42% and you're going to get whacked a little on taxable gains at the end of the year on your 1099 as you have to pay taxes on the inflation adjustment annually for all the tips the fund holds. My bet is the paltry 1.42% yield will just about cover the taxes.
Considering I like to drain the dividends and interest (because theoretically I'm paying taxes on them already) and leave the principal intact...I dont care much for the tips fund...especially in a taxable account.
For what its worth, I do have a very small percentage of my assets in the vanguard tips fund in a Roth I started last year.
As far as holding tips or any other bonds in a retirement account...except for that small Roth my IRA is 100% equity. Unless you're less than 10 years away from tapping it, I'm not sure why you'd hold a lot of bonds in an IRA.
Peter
Full time employment: Posting here.
Well ... if you like the partial inflation protection offered by TIPS, then a tax sheltered account is the best place to hold them, since you don't have to pay tax on the 'phantom' capital gain caused by inflation adjustment.
You can also argue that holding equities in an IRA is a waste, since there's no income thrown off until you sell, so there's no tax to shelter.
As usual, it all depends on individual circumstances ...
Peter
cute fuzzy bunny
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I agree that almost everything depends on individual circumstances.
However, your equities comment isnt exactly on target...you have to hold SOMETHING in your ira, and the initial pretax advantage of an ira is the big benefit. True if you're holding individual equities that pay no dividends, then aside from the initial tax avoidance of the contribution, the ira wouldnt benefit you. Most people hold mutual funds in their iras and most of those throw off taxable dividends and capital gains.
If you're a believer in past historical return patterns, and you think equities will deliver higher returns than bonds going forward, then statistically holding more than 20% bonds in a retirement fund you arent going to tap for 10-20 years still doesnt make much sense to me. You hold bonds to stabilize volatility in a portfolio, although then tend to drag down returns. Less than 20% equities and you're hurting returns to gain an imperceptible volatility benefit. Less than 20% bonds and you're increasing volatility without much increase in returns. But why are you worried about volatility in something you're not going to tap into for decades?
However, your equities comment isnt exactly on target...you have to hold SOMETHING in your ira, and the initial pretax advantage of an ira is the big benefit. True if you're holding individual equities that pay no dividends, then aside from the initial tax avoidance of the contribution, the ira wouldnt benefit you. Most people hold mutual funds in their iras and most of those throw off taxable dividends and capital gains.
If you're a believer in past historical return patterns, and you think equities will deliver higher returns than bonds going forward, then statistically holding more than 20% bonds in a retirement fund you arent going to tap for 10-20 years still doesnt make much sense to me. You hold bonds to stabilize volatility in a portfolio, although then tend to drag down returns. Less than 20% equities and you're hurting returns to gain an imperceptible volatility benefit. Less than 20% bonds and you're increasing volatility without much increase in returns. But why are you worried about volatility in something you're not going to tap into for decades?
Its a big mistake imo,not to have a slug of boring bonds in the portfolio.Swinging for the fences in equities is fun on the up days,but i suspect theres many here still waiting to get back to b/e from 3/2000.We have AAAcorps,TIPS,STRIPS,foreign bond,and preferred/High yield closed end funds(fat 5-10% monthly divvies),a small amount of treasuries( i think 5yr bills).Im happy with them all.Will i get 10%/yr from most of them?Probably not,but i could care less.They are all up/or flat after coupons for the year.Many are waiting for yields to rise for some fat(ter) CD's whatnot.How long have you been waiting?The biggest rise will happen on the front end of the curve(shorter maturities say 13 wks-1yr)
In the mean time the TIPS auctioned this year have gone up 3-5%.We have a portion in CD's as well,and will buy more in the future right after the jan 1 yearly IRA disbursment.I guess the point im trying to make is,unless you have a good grasp of markets(not the theory stuff ,but actuall chart work)you will rarely catch the bottoms/tops in rates or any market.While your earning diddly on your money market ,you just lost a few more diddlies waiting for rates to rise,as the inevitable inflation nibbles away at your principle and you didnt even know it.Pretty much got to stash money everywhere it seems.More risk profile for youngins,but dont neglect various bond instruments imo.
In the mean time the TIPS auctioned this year have gone up 3-5%.We have a portion in CD's as well,and will buy more in the future right after the jan 1 yearly IRA disbursment.I guess the point im trying to make is,unless you have a good grasp of markets(not the theory stuff ,but actuall chart work)you will rarely catch the bottoms/tops in rates or any market.While your earning diddly on your money market ,you just lost a few more diddlies waiting for rates to rise,as the inevitable inflation nibbles away at your principle and you didnt even know it.Pretty much got to stash money everywhere it seems.More risk profile for youngins,but dont neglect various bond instruments imo.
Peter
Full time employment: Posting here.
TH, I don't argue with your observations on volatility vs long term returns. My only point is that there can be good reasons to hold TIPS in a tax sheltered account.
In my own case, about 20% of my portfolio is in TIPS, with present coupon-plus-inflation yields ranging between 3% and 6%. I would much rather shelter that income in an IRA than the ~1% dividend yield of an S+P mutual fund. And, of course, I also got the pretax advantage of the IRA contribution when I bought the TIPS in the first place.
Sure, if the equities in question were high yield dividend stocks, the picture would change - hence my comment that it all depends on circumstances.
Peter
In my own case, about 20% of my portfolio is in TIPS, with present coupon-plus-inflation yields ranging between 3% and 6%. I would much rather shelter that income in an IRA than the ~1% dividend yield of an S+P mutual fund. And, of course, I also got the pretax advantage of the IRA contribution when I bought the TIPS in the first place.
Sure, if the equities in question were high yield dividend stocks, the picture would change - hence my comment that it all depends on circumstances.
Peter
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