Ibonds when to stop buying?

[big-papa]

I treat Ibonds as inflation adjusted "wealth storage" whose earnings are tax-deferred. Since 2017, we've each purchased our $10K max +$5K via tax refund. The first ones will mature when we're in our mid 80's.

Multiple purposes.
- Large Lumpy expenses
- Emergencies
- We use a variable withdrawal method so there's always the possibility that a withdrawal might not be enough to cover the basics, so we could use Ibonds to cover such a hole, though we have other ways of doing that as well.

Planning on doing in Jan 2024 as we've always done and purchase our $10K each and sometime in Q1 get our taxes done early enough to catch the current high fixed rate for the $5K. We have no interest in creating trusts for this purpose, but we'll also be monitoring things before May and might choose to purchase additional Ibonds via the gift-box at TD if it looks like things are trending such that May fixed rate is below the current fixed rate & we don't need the money used to purchase these for anything else..

Other than that, we'll just continue to rinse & repeat with no definitive plan in sight for stopping.


Cheers
Big-Papa

 

[big-papa]

It seems most here get wrapped up in looking at yields vs other govvies, etc. I just don't look at I bonds or TIPS that way. To me, they are protection against catastrophic inflation, which we actually had a brush with recently. Did you enjoy it? Me neither.

So my answer to your question is: Stop when you feel you have enough inflation protection. I think this leads to a far larger number than the 5%-of-portfolio that is often mentioned.

In our case, we decided that the biggest threat to our retirement was inflation like we saw in the late 70s, early 80s. So we invested very serious six figures in TIPS in 2006, the 2s of 26 to be specific, and have been holding them since. So in a couple of years we'll have to decide how much inflation risk we still have and how much protection we want.

Those of us "of a certain age" remember the 70's and early 80's quite well even though we were kids and are thankful that today there are instruments like TIPS and I-bonds which didn't exist back then.

We also generally don't chase yield, either, though with the current high Ibond fixed rate, we might still choose to purchase additional Ibonds in the spring via the TD gift box, if it looks like the fixed rate in May is going to drop substantially. If we do that, those will likely be the last ones we purchase because between TIPS, Ibonds and SS (even if there is a haircut), I think we'll have the basics well covered.

Cheers
Big-Papa

 

[Phroig]

I can’t decide. I was hoping to be done with the whole gift box thing in 2024. The fixed rate is nice, but that’ll mean more gifting for 2025 and later. Also, the inflation component’s coming down, so the composite rate might not be very attractive going forward.

 

[audreyh1]

I never worry about the inflation component. It tracks, more or less. What I care about is the fixed above inflation. And this is the highest fixed rate in over 20 years.

 

[Chuckanut]

I never worry about the inflation component. It tracks, more or less. What I care about is the fixed above inflation. And this is the highest fixed rate in over 20 years.

+1 and Bingo!

Note that the fixed rate on TIPS was over 2% just about a week ago. Today it is about 20 basis points under 2%, and about 40 basis points lower than its high of a few months ago. Those who waited thinking the rates might go up further, or whatever, were caught wearing their big cowboy hats as the cattle stampeded away. Lesson learned.

 

[audreyh1]

Well I haven’t stopped yet, and I intend to buy the latest IBond in January.

But I did redeem a couple of IBonds this month. These were my two lowest fixed rate IBonds. One I had just held for a year and so the accrued interest was small. The other closer to 10 years, with only 0.2 fixed rate. Due to the long period it had accrued quite a bit of interest, and most of that was over the last 3 years when the inflation component was so high.

But you gotta pay the taxes some time so I opted to recycle into a much higher fixed rate which I plan to do in January.

 

[friar1610]

My I bonds from 2000 to 2003 are going to make the RMD tax torpedo look like a fire cracker. I have a few years to figure what to do but it is going to hurt.

If/when you come up with any strategies, I hope you’ll share. The trick seems to be finding the right balance between not leaving too much on the table (by redeeming too many too early) and hurting yourself tax-wise (by redeeming too many in the same tax year instead of spreading the redemptions).

 

[audreyh1]

If/when you come up with any strategies, I hope you’ll share. The trick seems to be finding the right balance between not leaving too much on the table (by redeeming too many too early) and hurting yourself tax-wise (by redeeming too many in the same tax year instead of spreading the redemptions).

Partial redemptions can help smooth things out but still means leaving money on the table. Pretty much an age old tradeoff.

 

[Sunset]

Partial redemptions can help smooth things out but still means leaving money on the table. Pretty much an age old tradeoff.

I suppose a person can always redeem the lowest fixed interest rate ones first, so they work on the "problem" and still let the highest rate ones earn.

 

[mrfeh]

If/when you come up with any strategies, I hope you’ll share. The trick seems to be finding the right balance between not leaving too much on the table (by redeeming too many too early) and hurting yourself tax-wise (by redeeming too many in the same tax year instead of spreading the redemptions).

Partial redemptions can help smooth things out but still means leaving money on the table. Pretty much an age old tradeoff.

I suppose a person can always redeem the lowest fixed interest rate ones first, so they work on the "problem" and still let the highest rate ones earn.

I think you can report interest as income without redeeming the bond, but I'm not positive.

See "reporting the interest every year":

https://www.treasurydirect.gov/savings-bonds/tax-information-ee-i-bonds/

 

[audreyh1]

I think you can report interest as income without redeeming the bond, but I'm not positive.

See "reporting the interest every year":

https://www.treasurydirect.gov/savings-bonds/tax-information-ee-i-bonds/

If you do it every year. And if you switch to that you have to pay tax on all accrued interest so far on all your IBonds.

 

[mrfeh]

If you do it every year. And if you switch to that you have to pay tax on all accrued interest so far on all your IBonds.

Thanks...it wasn't clear to me from reading that page you couldn't pay interest just in years you wanted to.

 

[Accidental Retiree]

If you do it every year. And if you switch to that you have to pay tax on all accrued interest so far on all your IBonds.

Audrey, I need some clarification.

We did a partial redemption—I wanted to see how it works—and the Treasury calculated a prorated $145 of taxable interest on that portion for 2023.

I’ve been assuming that we will only report interest on the bonds we’ve redeemed, but now I’m wondering.

Is ALL the accrued interest on all my IBonds now required to be reported and taxed annually because of this partial redemption?

Or is the interest only taxable on anything I redeem, with the unredeemed bonds still accruing interest that will remain untaxed until redemption?

 

[aja8888]

What happens to the Ibonds I bought on the following dates going forward? I was planning on selling these after 1/1/24, but may leave them if they got the new rates on 11/23? Thanks!

I bond purchases:

10/25/2021
1/10/2022

 

[Sunset]

Audrey, I need some clarification.

We did a partial redemption—I wanted to see how it works—and the Treasury calculated a prorated $145 of taxable interest on that portion for 2023.

I’ve been assuming that we will only report interest on the bonds we’ve redeemed, but now I’m wondering.

Is ALL the accrued interest on all my IBonds now required to be reported and taxed annually because of this partial redemption?

Or is the interest only taxable on anything I redeem, with the unredeemed bonds still accruing interest that will remain untaxed until redemption?

I'll jump in while waiting for the coffee.
Here is my guess, and hopefully it works this way:

I switched to claim our I-bond interest yearly last year, so when I sell our I-bonds, I have to subtract the claimed interest from what TD says each i-bond earned - as they have no record of my claiming.

In your case they know the interest already paid on that bond.

For the i-bond you did a partial redemption you claim the $145 interest on taxes this year. When you cash the rest of that I-bond you will claim the interest at that time that is paid. As they have a record so should not over-state the amount of interest it has earned when cashed.

Your other I-bonds are not affected, so claim them as you cash them.

 

[Sunset]

What happens to the Ibonds I bought on the following dates going forward? I was planning on selling these after 1/1/24, but may leave them if they got the new rates on 11/23? Thanks!

I bond purchases:

10/25/2021
1/10/2022

Both these are 0% fixed rate ones. They will always be 0% fixed rate (plus the 6 month rate).

If bought a new I-bond now, it will get the 1.3% fixed rate (plus the 6 month rate).

You could buy a new one NOW, and in January, and then sell your 2 0% fixed rate ones and get a much better earnings for the next 30 years.

 

[aja8888]

Both these are 0% fixed rate ones. They will always be 0% fixed rate (plus the 6 month rate).

If bought a new I-bond now, it will get the 1.3% fixed rate (plus the 6 month rate).

You could buy a new one NOW, and in January, and then sell your 2 0% fixed rate ones and get a much better earnings for the next 30 years.

Thanks, that's what I was thinking but needed confirmation on.

 

[audreyh1]

Audrey, I need some clarification.

We did a partial redemption—I wanted to see how it works—and the Treasury calculated a prorated $145 of taxable interest on that portion for 2023.

I’ve been assuming that we will only report interest on the bonds we’ve redeemed, but now I’m wondering.

Is ALL the accrued interest on all my IBonds now required to be reported and taxed annually because of this partial redemption?

Or is the interest only taxable on anything I redeem, with the unredeemed bonds still accruing interest that will remain untaxed until redemption?

If you have been deferring taxes paid on interest (which is the default method), when you do any redemption tax on the interest is owed for that tax year. If it’s a partial redemption then the interest accrued on the IBond is pro-rated. Treasury Direct spells out what is interest when you redeem as part of your confirmation. They also create an online 1099-INT for you the following January.

It’s only for what you redeem.

You did not switch your tax paying method by doing any redemption.

The annual tax on interest paying method is quite a bit more involved, you are in your own with record keeping and no annual 1099-INT, and you have to fill out an IRS form at redemption since the Treasury Direct 1099-INT at any redemption will report the entire accrued interest for each IBond or pro-rated for partial. The link provided above spells this out. https://www.treasurydirect.gov/savings-bonds/tax-information-ee-i-bonds/

 

[joesxm3]

I was doing a little planning today and I came up with a possible idea to spread out the huge amount of interest on my 2000, 2001 and 2002 I-Bonds.

Since I will be losing out on the juicy 3.6%, 3.4% and 2.0% real interest rates on these early bonds, if I am going to sell them early I need to figure a way to dull the pain.

My projected RMD's are much less of a problem because only 25% of my portfolio is in traditional IRA.

So, I am thinking that it might make sense to try to limit my income to stay in the 12% tax bracket (skipping ROTH conversions) and cashing in some I-Bond instead.

That would seem to save 10% eventual tax (i.e. 12% vs 22%) and would also be free of state tax. My state is phasing in IRA tax free, so 2024 is only 50%. That would leave 2024 and 2025 before IRA is 100% free of state tax.

This plan might be able to drop me down a little bit and maybe enough to avoid the jump from 24% to 32% for my 2030, 2031 tax years. My simple spreadsheet seems to indicate that I have a good chance of staying in the 22% bracket for the years that do not have I-Bond maturities.

Any thoughts on this?

BTW - my expected I-Bond interest in 2030 and 2031 is about 8 times greater than my expected RMD. I will also be taking social security at that time, no doubt 85% being taxed.

 

[1242Vintage]

I’ll buy another round of I-bonds for wife and in January 2024. I’ll also continue buying them from federal tax return funds. Can purchase up to $5k with federal tax return monies.

Total planned purchase for 2024 will be $25k.

 

[GenXguy]

Well, just did my max I Bond purchase for the year. I keep deferring interest income because I need to keep my MAGI low the next several years for ACA. This doesn't move the needle much, so I have to figure something else out, maybe MYGA.

 

[livingalmostlarge]

I am buying more in January. I have around 60k each for dh and I. Six years. I was thinking maybe it would be our cash for when we first retire for sorr?

 

[Sunset]

A married couple really have no limit on how much I-bonds they can purchase by using the gift box method.

I'm thinking in the new year, we will purchase $60k worth of gifts in total, part of it is to replace the $40K we will have redeemed that were paying 0% fixed rate.

Of course this means we will be back on the gift deliver schedule for another 3 years !

 

[big-papa]

I never worry about the inflation component. It tracks, more or less. What I care about is the fixed above inflation. And this is the highest fixed rate in over 20 years.

Correct - Ibonds really were created for longer term investors vs. shorter term yield chasing as evidenced by the fact that you can't redeem for a year and you're going to forfeit the last 3 months interest if redeemed before 5 years. For long term investors, the fixed rate is what matters.

We've been purchasing annually for quite a while now and are teed up to purchase again in January as well as additional $5K from 2023's tax refund. Not sure if we'll purchase any more after this year.

One issue with redeeming low fixed rate Ibonds and repurchasing the latest high rate Ibonds is that if you don't do anything special, there's a good chance you'll never catch up to where you were with the lower rate Ibonds, due to the $10K limits and how much time you may have left. You can get mitigate this with trusts or even the gift box. At this point, we'll likely not bother as we have plenty stored up in Ibonds already, doing what we need them to do.

By the way, a good estimate of the next fixed rate is to average the previous 6 months 5-year T-Bill yield and multiply by 0.65, then round to the nearest 0.1%. The treasury is fairly opaque about how they arrive at the fixed rate, but this method has been accurate since about 2015 or so. Best accuracy is to do this calculation a week or so before the new fixed rate is announced in May and November. It's too early to do this estimate for May 2024 as there are only about 2 months worth of 5-year TIPS data. The trend is currently downward.

Cheers.