Do I-Bonds belong in a portfolio?

[pb4uski]

Quote:

Originally Posted by sadie1958 I agree with you. I am a single woman allowed to purchase only 10k per year. Will you explain to me how I can "gift"? Thank you.

It's a little harder for a single person IMO. Basically, married or single, you need to have a trusted person buy i-bonds on your behalf in a gift account. The i-bonds would be in your name and can only be delivered to you at some future year that you have unused allowance available.

In theory the risk should be minimal because gifts cannot be delivered to anyone other than you... but the person buying the gift needs to act to deliver the i-bonds in their gift account to your TD account.

What might work is to establish an account in the name of a trusted sibling or trusted friend who has no interest in Treasury Direct using your email addess and linked to your bank account... essentially you would be posing as them with their permission. You keep the logon credentials to yourself. Then you buy as many years of gifts for yourself as you want to and then annually login and deliver the gift to you.

[imnontrad]

I have started building up a portfolio for IBonds. But it is not really for investment, this will be my "emergency fund" - and that criteria is safety over appreciation (any interest is a bonus). I plan on not treating this as my emergency fund until after the interest rate has dropped low OR the bonds are past the 5 year point.

[imnontrad]

Quote:

Originally Posted by marko How does that tax refund work?

When you file your taxes, if you have a refund due, you can ask for up to $5,000of that refund be given to you in IBonds.
If you pay quarterly estimated taxes, you can accomplish this by paying a lot more in your last payment for the year.

[Chuckanut]

Quote:

Originally Posted by imnontrad I have started building up a portfolio for IBonds. But it is not really for investment. This will be my "emergency fund" - and that criteria is safety over appreciation. I plant on not treating this as my emergency fund until after the interest rate has dropped low OR the bonds are past the 5 year point.

+1
Most of us need an emergency pile of money in case of unexpected expenditures. Why not have it in an inflation protected, government guaranteed bond one can redeem at any time after one year? Works for me.

[Chuckanut]

Quote:

Originally Posted by sadie1958 I agree with you. I am a single woman allowed to purchase only 10k per year. Will you explain to me how I can "gift"? Thank you.

If you have a trusted relative you might agree to exchange gifts with each other. Or you can create your own revocable trust and buy another 10K in an account for the trust. Below is a link explaining the mechanics of Ibond purchases and how to avoid a few pitfalls

https://thefinancebuff.com/how-to-bu...r%2010%20years.

Here's the trust information:

https://thefinancebuff.com/buy-more-...ect-trust.html

[daylatedollarshort]

We buy TIPS instead of I bonds as we buy them for our retirement accounts. Social Security, pensions and a TIPS ladder more than cover all our retirement expenses. SS and TIPS are inflation adjusted, we have a fixed rate mortgage that doesn't go up with inflation, and property taxes that are capped because of Prop 13, so in my models we come out ahead during high inflation.

We have other investments, too, but the TIPS work well for covering the basic expenses and have been good for the recent period of high inflation.

[shotgunner]

A couple of nice features of I Bonds, the gain from interest compounds and is not taxable income until you decide to redeem them. This was helpful to me in managing my taxable income for the Obamacare subsidy. It also did not show as taxable income for the calculation of child support when I was paying it. Finally the interest on I Bonds (government securities) is not taxable (5% over $2400 in combined dividends and interest) in the state of NH where I live. I was fortunate to buy them at a time when the fixed rate was 1% and the annual purchase limit of $60K.

[JOBO]

Quote:

Originally Posted by marko Hmmmm. I need to do some research. Are the trusts revocable or irrevocable? Or does it matter?

Doesn't need to be a trust. Just something with an EIN and a bank account. A single person with an LLC can buy 20k per year plus gifts plus up to 5k from a tax refund.

[pb4uski]

^^^^ It doesn't even need to be that... many revocable living trusts don't have EINs or bank accounts.... I used our SSNs and our personal joint checking account for our three revocable living trusts as none of them have EINs or bank accounts.

[JBTX]

I’ve always viewed ibonds primarily as an extension of our emergency/ liquidity fund. Have been contributing for approx 15 years, off and on, but last couple of years with high inflation piling in using trust, self employed business and gifts to wife and back.

I do understand they are zero real return, and actually negative when taxes eventually come out, but that’s a lot better than any other “safe” investment these days. We also have TIPS in retirement accounts.

I saw an article in Forbes kind of poo pooing ibonds recently. I thought author kind of missed the mark.

https://www.forbes.com/sites/baldwin/2022/06/12/i-bonds-and-tips-compared-which-are-a-better-buy/?sh=7b8d891e4236

[Gumby]

One problem with the article is the assertion that you need to wait five years to redeem I-bonds. You don't. You can redeem after one year; there is just an early redemption penalty equal to the last three months of interest. Similar to the penalties for redeeming a CD early. Additionally, I don't believe that most of us will hold an I-bond for 30 years. I will only hold until a better deal for my cash can be had elsewhere. Then I'll switch.

[Archman]

Quote:

Originally Posted by Gumby Me too. In our case, we bought I-bonds with a portion of the money that was just sitting in our checking account earning a princely 0.01% interest. Not a hard decision to make.

My thoughts exactly.

[pb4uski]

+1 While i-bonds are demonstrably better than short term CDs or short term UST at this point, if inflation subsides and short term CD and UST rates rise, it will be interesting to see if/when we reach a crossover point. As long as i-bond crediting rates stay competitive with short term CDs and UST then I'll keep them.

[big-papa]

Interesting. I only wish that I had started purchasing these puppies sooner.

Anyway, my plan is to start redeeming them concurrent to starting SS and to think of them as a COLA'd adder to SS till our early/mid 80's when we'll look at SPIAs. In other words, we'll use them as an income stream.

How much that adder will be depends on how many more years we'll continue to purchase them.

Cheers,
Big-Papa

[HarryHawk]

Seeing how at the current rates, the iBonds pay close to a couple orders of magnitude more interest than the .01% my bank pays, even moving a small fraction of the money over may equal or outperform what is left behind.

[RunningBum]

I wouldn't compare I-Bonds to 0.01% bank savings rates, because there are plenty of better fixed income options. That said, I have bought my limit (without creating a trust or finding a gift partner) the last two years and will hold them and buy more as long as they are the best fixed income option out there if you can hold them at least a year.

[calmloki]

Quote:

Originally Posted by pb4uski ^^^^ It doesn't even need to be that... many revocable living trusts don't have EINs or bank accounts.... I used our SSNs and our personal joint checking account for our three revocable living trusts as none of them have EINs or bank accounts.

I'm a bit confused - gifting $10k to spouse in 2025, say, uses up their ability to buy $10k in I bonds in 2025. So I gift $10k to spouse in 2025 and she cashes it in, paying a 3 month interest penalty. Now she can't buy more than $10k/year, but can she be gifted an unlimited amount? Can I gift her $20k or $50K in 2025? Can I gift her $10k and have various trusts also gift her $10k amounts?

If inflation drops and we want to sell and move funds to some more lucrative investment are we trapped by a $10k/year limit if we can only acquire $10k in I bonds/year? edit: assuming spouse has $10k in her I bonds account and, say, $50k in gifts to her sitting in my gift box.

[Gumby]

No. While you can buy unlimited gifts in any year (and hold them in your gift box), you can't receive unlimited gifts in any year. In any one year, she can either buy $10k for herself or receive a gift of $10k (face amount) from you. So, while I currently have $30k in gift bonds for my young wife (and vice versa), it will take three years to deliver them (on 1/1/23, 1/1/24, and 1/1/25). So we have frozen $20k for 2-1/2 years, $20k for 1-1/2 years and $20k for 6 months. Depending on inflation and interest rates outlook later this year, we may buy another $20k in gift I-Bonds in October, to be held until 1/1/26.

The way I have been analyzing is as follows: In October 2022, I will know two things - the current I-Bond rate if I buy in October and the rate that will start on November 1, 2022. I will get those rates for the first year. So assume that the rate reset for November is 7% (the actual number won't be known until 10/10/22). That means I'll get the current 9.62% APR for six months followed by 7% APR for six months, or 8.48% compounded for the first year. Then I assume I-Bond rates fall to zero and stay there until we can cash out on 1/1/26 (which means we can ignore the 3 month early redemption penalty, because it will be zero). So I will have 8.48% for a holding period of about 3 years and two months - an APR of 2.61% I will make the actual calculation after October 10th, compare that to the alternatives for the same holding period (adjusted for the fact that I don't pay state tax on I-Bond interest) and do whatever is best at that time.

In all likelihood, I-Bond rates will not go to zero, but that's the worst case analysis.

[calmloki]

Quote:

Originally Posted by Gumby No. While you can buy unlimited gifts in any year (and hold them in your gift box), you can't receive unlimited gifts in any year. In any one year, she can either buy $10k for herself or receive a gift of $10k (face amount) from you. So, while I currently have $30k in gift bonds for my young wife (and vice versa), it will take three years to deliver them (on 1/1/23, 1/1/24, and 1/1/25). So we have frozen $20k for 2-1/2 years, $20k for 1-1/2 years and $20k for 6 months. Depending on the inflation outlook later this year, we may buy another $20k in gift I-Bonds in October, to be held until 1/1/26.

But could she receive $10K from me and $10k from any number of others or trusts or businesses? The gradual acquisition and redemption of the I bonds is something to ponder - potentially being trapped in a low earning investment and unable to liquidate as quickly as desired.

[Gumby]

My understanding of the regulations is that she can receive only $10k face value total, from any person/entity or combination of persons/entities. So, yes, your money is locked up until you can legally deliver the gift. That's why I do a worst case analysis assuming that I-Bond interest falls to zero and stays there until you can deliver and cash out.