IBonds

[Livefree]

Since they mature and stop accruing interest after 30 years you may want to plan to cash them in over a few years to save a big tax hit in a single year. e.g. if you had a sudden spike in income that jumped up your Medicare premiums through IRMAA, that would bite even deeper into the interest gain

If you received a $10k IBond which is now worth $30k you can incrementally cash it in, you don't have to cash in the whole bond at once. I think that also applies to Ibonds that have matured but am not sure.

Good info Thanks I will plan to cash them slowly over the next 10 years..but hate to since they're such good earners.

 

[bjorn2bwild]

I have a few Ibonds from exactly that year....buttttt, I'm starting to think the tax ramifications will be a real B^&ch...Will cash them out at the 30 year mark and have huge gain as well as MRD on both mine and my DH's IRA's. It won't be pretty. I had planned to use the education exemption to help with taxes but found out from reading this board that GK don't fit the rules in regards to that.

One option we are considering is to match some or all of the taxable gain with the purchase of a charitable gift annuity.
In our case, there are no heirs of concern.

 

[RunningBum]

In the bogleheads thread asking why I Bonds are so great, someone lists:

After a year, they're completely liquid (with 3 month interest forfeiture)
After 5 years, liquid with no loss of interest

These make I bonds great?? That's more limiting than almost any other investment I have except perhaps my 4 and 5 yr CDs.

Great for an emergency fund? As long as my emergency doesn't happen for a few years, I guess.

At a $10K purchase limit each year, I don't see these adding up to much, and it adds another complexity for my estate if I die with them.

Runaway inflation protection is nice. I think stock funds are a pretty good defense. I can also invest in MM funds if rates start to rise, or lock into CD rates if I think they've peaked.

No state income tax is nice and can be factored in to the total return. I suppose deferring income is nice while trying to manage MAGI, but my plan for the cash in my taxable account is to consume it between now and 65 in a CD ladder with predictable return. A balloon of income when redeeming does not do that. If I held beyond that I'm looking at being in a higher tax bracket with SS and pension. I think I could choose to report the income yearly? That's more predictable but you've lost that supposed deferred income advantage.

I see some value in I bonds, but not enough to pull the trigger.

Tell me where I am wrong.

 

[ivinsfan]

RB no one said you were wrong, the happiest people are ones that bought almost 20 years ago.

I bought mine with some money I got from my DM's estate and had educating future GK' in mind. But as so often happens lack of proper research means the bonds won't do what I wanted them to. Before anyone accuses me of try to dodge taxes, I simply misunderstood the tuition exclusion..

 

[Spock]

Dunno about IBonds, but I read that tax is due the year EE bonds mature, even if you cash them in years after maturity. IF it applies to IBonds and you want to spread the income tax, it means cashing them early...

 

[samclem]

I see some value in I bonds, but not enough to pull the trigger.

Tell me where I am wrong.

I don't think you are wrong now, but if they ever got to 3+% real return again, I'd jump on them (again).

Runaway inflation? I-Bonds or TIPS will be better protection than stocks. When inflation (or fear of higher inflation) gets high enough to spook the capital markets, generally hurts (a broad basket) of stocks enough that they lag inflation.

 

[big-papa]

Dunno about IBonds, but I read that tax is due the year EE bonds mature, even if you cash them in years after maturity. IF it applies to IBonds and you want to spread the income tax, it means cashing them early...

Or build a ladder out of them by buying some every year and then cash them out in reverse order over time at some point in the future which is <30 years. It does mean that some planning is in order regarding when you first start purchasing Ibonds relative to when you expect to start cashing them out and when the 30 year wall hits. But do-able.

 

[big-papa]

In the bogleheads thread asking why I Bonds are so great, someone lists:
These make I bonds great?? That's more limiting than almost any other investment I have except perhaps my 4 and 5 yr CDs.

Great for an emergency fund? As long as my emergency doesn't happen for a few years, I guess.

At a $10K purchase limit each year, I don't see these adding up to much, and it adds another complexity for my estate if I die with them.

Runaway inflation protection is nice. I think stock funds are a pretty good defense. I can also invest in MM funds if rates start to rise, or lock into CD rates if I think they've peaked.

No state income tax is nice and can be factored in to the total return. I suppose deferring income is nice while trying to manage MAGI, but my plan for the cash in my taxable account is to consume it between now and 65 in a CD ladder with predictable return. A balloon of income when redeeming does not do that. If I held beyond that I'm looking at being in a higher tax bracket with SS and pension. I think I could choose to report the income yearly? That's more predictable but you've lost that supposed deferred income advantage.

I see some value in I bonds, but not enough to pull the trigger.

Tell me where I am wrong.

I also don't exactly understand the argument for use as an emergency fund, either, especially relative to other choices.

But Ibonds - great? No, not great, at least not at todays rates. But they can useful, especially if you've already filled up all of your tax deferred space. I do wish that the amount that you could purchase each year was itself inflation indexed, but it's not.

 

[Koolau]

Yeah, I still kick myself for not jumping all over I bonds back when they actually paid something. I bought $60K in '03 (DW and me). Wish I'd started earlier and kept at it. BUT, for those worried about taxes, yes, you have to pay on the gains. NO, you don't have to wait and cash them ALL in at 30 years. You can "titrate" your taxes with strategic cashing before you hit 30 years. IF you end up with some of the problems of "too much income" (so you have to pay top marginal rate or, heaven forbid, pay more for MC) you could make a case for "that's NOT the worst situation a retiree could face." As always, YMMV.

 

[RunningBum]

Tell me where I am wrong.

RB no one said you were wrong, the happiest people are ones that bought almost 20 years ago.

It was my first post on the topic. I wasn't trying to be defensive, or offensive. Just layout out my thoughts and situation, and genuinely asking what I might be missing, as an investment option going forward.

 

[audreyh1]

If it comes down to it in 2033 I’ll just take a big tax hit in one year, perhaps pay higher IRMAA two years later (or it will make no difference), then it will all be over. Not fretting over it.

 

[ivinsfan]

It was my first post on the topic. I wasn't trying to be defensive, or offensive. Just layout out my thoughts and situation, and genuinely asking what I might be missing, as an investment option going forward.

I don't think you are missing anything...

 

[Lsbcal]

If it comes down to it in 2033 I’ll just take a big tax hit in one year, perhaps pay higher IRMAA two years later (or it will make no difference), then it will all be over. Not fretting over it.

Why not do it over a few years? I don’t have a plan for 2031 in our case. But maybe I will do it over 3 years or so. Perhaps starting in 2029. Depends on the tax laws then.

 

[audreyh1]

Why not do it over a few years? I don’t have a plan for 2031 in our case. But maybe I will do it over 3 years or so. Perhaps starting in 2029. Depends on the tax laws then.

Sometimes it works it better to take a tax and IRMAA hit all in one year rather than spread out. You have to look at your marginal bracket and compare.

Also, once it matures you owe the tax, so to take out over several years means you are taking out some early and missing interest - if it’s a good rate you might not want to do this.

 

[mrfeh]

Sometimes it works it better to take a tax and IRMAA hit all in one year rather than spread out. You have to look at your marginal bracket and compare.

Also, once it matures you owe the tax, so to take out over several years means you are taking out some early and missing interest - if it’s a good rate.

Just FYI everybody - you can pay taxes on the interest as it accrues, without redeeming the bonds.

 

[Lsbcal]

I will make a note to revisit this in 10 years.

 

[audreyh1]

Just FYI everybody - you can pay taxes on the interest as it accrues, without redeeming the bonds.

Yes, you can. But then you give up the advantages tax-deferred compounding.

I think you have to pay taxes annually to do this.

 

[big-papa]

Yes, you can. But then you give up the advantages tax-deferred compounding.

I think you have to pay taxes annually to do this.

FYI - here is the page from TreasuryDirect
https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_itaxconsider.htm#report

 

[imoldernu]

Depends on what tax bracket you'll be in when the time comes to cash in the bonds. In our case, we're looking at this as the hedge for the time we'll need LTC...
In fact, because we're in the lowest bracket, today, we can cash a $10K bond w/minimum tax effect.

 

[Spock]

So today's IBond base rates look pitiful.
History suggests interest rates need to be reduced 3-6% to kick the economy out of a recession... Fed funds are currently at 2.4ish% (and the market is screaming for cuts).
Today there are 10 TRILLION dollars worth of bonds with negative interest rates.

The phrase "These are the good old days" comes to mind....

https://www.bloomberg.com/opinion/a...ative-interest-rates-may-soon-become-the-norm

 

[Sunset]

^^^^
Actually .5% above inflation is not bad, it insures the money purchasing power grows.

As for cutting interest rates, there is no need as we are not in a recession, and the bloomberg article suggesting cutting rates is how to get out of debt is crazy. If there is a negative interest rate, I'll borrow Billions and the bank can pay me to do that.

It's precisely the low interest rates that have allowed and encouraged everyone, especially govn't to borrow because it's easy and cheap. Slowly raising rates will force them to recognize the costs of borrowing, and fear the future higher rates, so they will stop borrowing and start to pay off debts.

One does not even need negative interest rates to hurt savers, just low interest has done that, but fortunately inflation has also been low, so the effect so far has been minimal.

 

[Spock]

^^^^

As for cutting interest rates, there is no need as we are not in a recession, and the bloomberg article suggesting cutting rates is how to get out of debt is crazy. If there is a negative interest rate, I'll borrow Billions and the bank can pay me to do that.

This article was the first I read that suggested it was a way out of debt. However there are a lot of articles suggesting we will see negative rates on US debt after the next financial "event/crisis/recession".

Slowly raising rates will force them to recognize the costs of borrowing, and fear the future higher rates, so they will stop borrowing and start to pay off debts.

With just a little tongue in check: How well did that work late last year? The treasury secretary was calling banks from Cabo on Christmas vacation, the president was calling out the Fed chair, markets were tanking almost 20%, and yet rates aren't back to half what they were pre-crisis.

 

[imoldernu]

A look at the national debt, which has doubled in 10 years.
Remember 1Billion = 1,000 Million... 1trillion =1,000 billion.

Here are last year's numbers.

More interesting is where the increase came from... The 'Why" of the borrowing, and what the rationale was. Where the money went is another story.

The numbers in real time.https://www.usdebtclock.org/

 

[big-papa]

Just FYI everybody - you can pay taxes on the interest as it accrues, without redeeming the bonds.

This same topic is going on over at bogleheads.
A spreadsheet analysis was done (downloadable):
https://www.bogleheads.org/forum/viewtopic.php?f=2&t=279682&newpost=4515157&view=unread#p4515157

Cheers.

 

[foxfirev5]

I will make a note to revisit this in 10 years.

Yeah, the investment climate for I bonds is much more muted now. I remember in addition to high fixed rates, that you could use a credit card to buy the bonds while incurring no fees and capturing the credit card perks. That didn't last long. As others have stated how can I capitalize on I bonds now?

I'll continue to buy but the thrill is gone.