The I Bond Thread

[Alvin Tostig]

We did our $20,000 deposit at the 7.12 rate in December and were just about to do the next $20,000 in January..when I had the following thought.

Does it make any sense to wait until the next 6-month rate to be announced...and at that point take the better rate whether it's the current rate or the next period's rate? With inflation now a reality and projected Fed increases in 2022, is this a deposit strategy that has any validity?

 

[Dash man]

I Bond rate 11/2021

We did our $20,000 deposit at the 7.12 rate in December and were just about to do the next $20,000 in January..when I had the following thought.

Does it make any sense to wait until the next 6-month rate to be announced...and at that point take the better rate whether it's the current rate or the next period's rate? With inflation now a reality and projected Fed increases in 2022, is this a deposit strategy that has any validity?

To me, no. You will still get the next 6-month rate 6 months after you purchase iBonds at the 7.12% rate. What will your cash earn for you between now and May 1?

 

[Gumby]

We did our $20,000 deposit at the 7.12 rate in December and were just about to do the next $20,000 in January..when I had the following thought.

Does it make any sense to wait until the next 6-month rate to be announced...and at that point take the better rate whether it's the current rate or the next period's rate? With inflation now a reality and projected Fed increases in 2022, is this a deposit strategy that has any validity?

The current 7.12% is all inflation adjustment; the base rate is 0%. It has always been my impression that increases in the fed funds rate is what drives inflation down, so I would expect the I-bond rate to be lower after a fed funds rate increase. But I could easily be wrong.

 

[walkinwood]

If I understand it correctly, we have a choice on how to handle taxes on i-bonds. Either pay taxes on dividends each year or pay taxes on accumulated dividends when you sell the i-bond.


How do you specify which option you're adopting?


Can you pay taxes on interest annually for a few years and then stop & pay taxes on subsequent interest when you sell the bond?


Are there any non-obvious pros/cons?

 

[steelyman]

I bought half of my expected 2022 purchase earlier in January. The other half is still in cash and ready to go. There will be two upcoming I Bond rate adjustments in 2022: May and November.

I don’t have any idea if that is the “right” thing to do.

 

[Gumby]

There is more recordkeeping for you if you report and pay taxes on the imputed interest annually. Also, it reduces your income headroom for making Roth conversions. You don't have to pay taxes on interest for at least 30 years if you never redeem the I-bonds. Make it your kids' problem.

That's why I am not planning to pay taxes annually on them.

 

[mystang52]

I bought half of my expected 2022 purchase earlier in January. The other half is still in cash and ready to go. There will be two upcoming I Bond rate adjustments in 2022: May and November.

I don’t have any idea if that is the “right” thing to do.

If you have a stash put aside for the sole purpose of buying I Bonds, the time to do it is now. You will get whatever the new rates are on May 1 and November 1, at the 6month anniversary of your original I Bond purchase. So no reason to wait.

 

[steelyman]

If you have a stash put aside for the sole purpose of buying I Bonds, the time to do it is now. You will get whatever the new rates are on May 1 and November 1, at the 6month anniversary of your original I Bond purchase. So no reason to wait.

I suppose the possibility (unlikely) that the fixed rate might change is a reason.

 

[londo]

Can you pay taxes on interest annually for a few years and then stop & pay taxes on subsequent interest when you sell the bond?

From https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_itaxconsider.htm : "Once you start to report the interest every year ..., you must continue to do so every year after that for all your savings bonds... and any you acquire ... in the future."

(The ellipses were for parenthetical remarks about children's bonds, which I removed for clarity)

 

[Gill]

If I understand it correctly, we have a choice on how to handle taxes on i-bonds. Either pay taxes on dividends each year or pay taxes on accumulated dividends when you sell the i-bond.


How do you specify which option you're adopting?


Can you pay taxes on interest annually for a few years and then stop & pay taxes on subsequent interest when you sell the bond?


Are there any non-obvious pros/cons?

As others have posted, once you elect to pay taxes on the interest currently you must continue to do so.



Why would anyone elect to pay taxes 30 years in advance?


Gill

 

[Mulligan]

I bought half of my expected 2022 purchase earlier in January. The other half is still in cash and ready to go. There will be two upcoming I Bond rate adjustments in 2022: May and November.

I don’t have any idea if that is the “right” thing to do.

The Treasury is forced to give the inflation rate “gift”. And trust me it is based on anything else. There is no released guidelines to if they give a fixed component. I would bet my last buck next cycle will be a fat 0% as the next Ibond rate again be higher than any govt debt issue yet again.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.8 percent in November on a seasonally adjusted basis after rising 0.9 percent in October, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 6.8 percent before seasonal adjustment.

So, we are already at 1.7% just through two months of next cycle. 3rd month of cycle of CPI will be released tomm. So its definitely heading for another hot one. Take the 7.12% immediately and then get the next one which will be good, too. I personally maxed mine in Sept. to take the 3.56% knowing I get the 7.12% in March. Already bought 2022s to start on 7.12%.

 

[jollystomper]

I bought half of my expected 2022 purchase earlier in January. The other half is still in cash and ready to go. There will be two upcoming I Bond rate adjustments in 2022: May and November.

I don’t have any idea if that is the “right” thing to do.

My view is, since you have to hold them for at least a year, why not start the clock as soon as possible and buy now.

Even if the next rate adjustment is down, my bet is that it will still be way more than you will get in any bank or money market account.

And if after a year, for whatever reason the rates are very low, if you choose to cash out you only lose the last 3 months of the lower rate.

 

[pb4uski]

To me, no. You will still get the next 6-month rate 6 months after you purchase iBonds at the 7.12% rate. What will your cash earn for you between now and May 1?

+1 No for me as well. We'll be doing $5k as a 4Q2021 estimated tax payment tomorrow and $10K each the last week of January.

 

[steelyman]

I Bond rate 11/2021

My view is, since you have to hold them for at least a year, why not start the clock as soon as possible and buy now.

Even if the next rate adjustment is down, my bet is that it will still be way more than you will get in any bank or money market account.

And if after a year, for whatever reason the rates are very low, if you choose to cash out you only lose the last 3 months of the lower rate.

I guess it all depends how you view them. I look at them as what they are: a 30 year savings bond. Best case is that I never redeem them but I know they are there if necessary.

I bought $20K in Nov/Dec 2021 and $10K in January 2022. $10K left to go. I don’t mind waiting but not everyone feels the same.

The thing I am happiest about was realizing that I could open another (entity) account in Treasury Direct (well covered in this thread) and getting it done.

 

[Mulligan]

The Treasury is forced to give the inflation rate “gift”. And trust me it is based on anything else. There is no released guidelines to if they give a fixed component. I would bet my last buck next cycle will be a fat 0% as the next Ibond rate again be higher than any govt debt issue yet again.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.8 percent in November on a seasonally adjusted basis after rising 0.9 percent in October, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 6.8 percent before seasonal adjustment.

So, we are already at 1.7% just through two months of next cycle. 3rd month of cycle of CPI will be released tomm. So its definitely heading for another hot one. Take the 7.12% immediately and then get the next one which will be good, too. I personally maxed mine in Sept. to take the 3.56% knowing I get the 7.12% in March. Already bought 2022s to start on 7.12%.

.6% print today. So halfway through next IBond cycle its 2.3% with 3 to go.

 

[Montecfo]

Interesting article by Andrew Bary in Barron's today (electronic version) about I-bonds. Essentially says the same things that are stated here, 12 month min, 30 year life, 3 month penalty if redeemed before 5 years. Compares them favorably to TIPS. Can be tax free when used for education. No SALT. Says they are a good alternative to savings accounts and most bonds for small savers. Even talks about the tax refund deal.

Behind paywall so I have not linked it. But this strategy is getting some publicity.

 

[RunningBum]

With the 12 month required hold and 3 month penalty before 5 years, I'd compare I-bonds to CDs, not savings accounts.

 

[finnski1]

With the 12 month required hold and 3 month penalty before 5 years, I'd compare I-bonds to CDs, not savings accounts.

+1. That is exactly how I look at them and right now they are a good deal.

 

[pb4uski]

+1 No for me as well. We'll be doing $5k as a 4Q2021 estimated tax payment tomorrow and $10K each the last week of January.

I'm thinking more about this $5k estimated tax payment as I generally don't like having money on deposit with the feds... risk of tax identity theft, etc.

At this point I have paid in a tad more than my tax will be so I'm not subject to any underpayment penalties.

Let's say that I file my return in February. Why can't I make a $5k estimated payment for 2021 in February 2022 just before I file my return and file my return electronically the day that the withdrawal for the $5k estimated payment hits my bank account? The only thing that I would need to be careful of is that the $5k is clearly designated to be a 2021 estimated tax payment.

Wondering if that would work. Thoughts?

 

[MBSC]

.6% print today. So halfway through next IBond cycle its 2.3% with 3 to go.

1. The CPI-U for December was 0.5%. The 0.6% value excludes food and energy.
2. It's not as simple as adding the monthly percentages together.

Start with September CPI-U index value = 274.310
The December value released this morning = 278.802

U.S. Bureau of Labor Statistics
The Consumer Price Index for All Urban Consumers (CPI-U) increased...to an index level of 278.802.
Source: https://www.bls.gov/news.release/cpi.nr0.htm

278.802-274.310=4.492
4.492/274.310=0.0164 or 1.64% for 3 months.

For I Bonds. The December report is the third in a six-month series that will determine the I Bond’s new inflation-adjusted variable rate, which will be reset May 2 based on inflation from September 2021 to March 2022. After three months, inflation has been running at 1.64%, which translates to an I Bond variable rate of 3.28%. Keep in mind that three months remain, and also that lagging non-seasonally adjusted inflation in November and December should reverse in coming months.

Source: https://tipswatch.com/

 

[Sunset]

I'm thinking more about this $5k estimated tax payment as I generally don't like having money on deposit with the feds... risk of tax identity theft, etc.

At this point I have paid in a tad more than my tax will be so I'm not subject to any underpayment penalties.

Let's say that I file my return in February. Why can't I make a $5k estimated payment for 2021 in February 2022 just before I file my return and file my return electronically the day that the withdrawal for the $5k estimated payment hits my bank account? The only thing that I would need to be careful of is that the $5k is clearly designated to be a 2021 estimated tax payment.

Wondering if that would work. Thoughts?

Sounds like a good idea.
As I feel gov't systems can be slow, I'd pay the estimated tax and then a few days later file the return.

At the end of last year, I did a 5k withholding on roth conversion, just to get an extra $5K in there for bonds this year.

 

[RunningBum]

I'm thinking more about this $5k estimated tax payment as I generally don't like having money on deposit with the feds... risk of tax identity theft, etc.

At this point I have paid in a tad more than my tax will be so I'm not subject to any underpayment penalties.

Let's say that I file my return in February. Why can't I make a $5k estimated payment for 2021 in February 2022 just before I file my return and file my return electronically the day that the withdrawal for the $5k estimated payment hits my bank account? The only thing that I would need to be careful of is that the $5k is clearly designated to be a 2021 estimated tax payment.

Wondering if that would work. Thoughts?

I didn't submit it, but in EFTPS I was able to schedule a 2021 estimated tax payment on 2/15/2022. Can't say whether it would still go through if I submitted it. And I don't know if the option is still available after 1/15/22 if you don't want to schedule it today. So you'd have to weigh the convenience of a last minute payment vs. the chance you can't do it.

You're not responsible for lost money with tax ID fraud if you report it, are you? It's a huge hassle, but in the end you won't be out an extra $5K because you had sent it in, right?

I'm not familiar with other methods to make estimated payments so I don't know if it would work there.

 

[RetiredAt55.5]

I'm thinking more about this $5k estimated tax payment as I generally don't like having money on deposit with the feds... risk of tax identity theft, etc.

At this point I have paid in a tad more than my tax will be so I'm not subject to any underpayment penalties.

Let's say that I file my return in February. Why can't I make a $5k estimated payment for 2021 in February 2022 just before I file my return and file my return electronically the day that the withdrawal for the $5k estimated payment hits my bank account? The only thing that I would need to be careful of is that the $5k is clearly designated to be a 2021 estimated tax payment.

Wondering if that would work. Thoughts?

I can't answer your question.

But, I just wanted to add to your risk list -

1. The paper bonds will be delivered via regular postal mail. IIRC, paper bonds were always easy to spot without even opening the envelopes. What if they never arrive? They would seem to be a PITA to deal with. That's my biggest fear, given the mail isn't as reliable as it used to be.

2. Probably another irrational fear, but if my return was flagged and added to the "to be processed later" list, the short term "loan" to get the bonds might not be so short term. I've read the IRS has a big backlog of returns from last year (well over a million).

Especially due to (1), I'm still debating if it's worth the hassle for that extra $5k of bonds, plus the hassle of having more physical paper bonds.

 

[Montecfo]

I think after January 18 you can still make a payment applicable to 2021, but it is too late to address Q4 estimated taxes is all-not particularly an issue here.

 

[Gumby]

We did our $20,000 deposit at the 7.12 rate in December and were just about to do the next $20,000 in January..when I had the following thought.

Does it make any sense to wait until the next 6-month rate to be announced...and at that point take the better rate whether it's the current rate or the next period's rate? With inflation now a reality and projected Fed increases in 2022, is this a deposit strategy that has any validity?

There is a good discussion on this question in the following

https://tipswatch.com/2022/01/04/i-bonds-a-very-simple-buying-guide-for-2022/