Author Topic: Tell me about ibonds  (Read 5236 times)

HopetoFIRE

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Tell me about ibonds
« on: September 20, 2014, 11:01:26 AM »
I am looking for a place to put our cash that would earn us higher than our Capital One savings account.  Someone has mentioned ibonds to me before and it seems like an interesting idea.  I just want to make sure that it's a good choice for us before plopping down $20k into it.  Our goal by retirement (7-10 years) is to have about 3 years worth of expenses in cash.  Our expenses do run on the higher side, so the cash volume would be higher.  So, we are currently keeping $100k in our higher-interest savings account as an emergency fund (maybe less, not sure yet) and plan on purchasing $20k worth of ibonds per year for the next 5-7 years. 

So, what I know about ibonds so far... the interest rate you look at is the composite rate, you can defer taxes until you redeem the bonds, you have to keep for at least 5 years if you don't want to lose part of your interest.  The deferment of taxes is appealing to me since we can redeem them when our tax bracket is much lower.  Would this be a good option for us if we plan on keeping 3 years of expenses on hand as cash vs dumping a large amount of money into our savings account?  What other options do you suggest?

Argyle

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Re: Tell me about ibonds
« Reply #1 on: September 20, 2014, 11:15:05 AM »
That's $10,000 per person per year?  Because that's the limit on I Bonds (http://www.treasurydirect.gov/indiv/research/articles/res_invest_articles_purchaselimits_0406.htm).  (Electronic bonds.  You can buy paper I bonds up to $5000 from IRS refunds.)

Note if you do purchase them, you can do so with a frequent-flyer or rewards credit card and get a nice compensation while saving the money.

So the deal is that this is money you wouldn't be needing for 7-10 years?

wtjbatman

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Re: Tell me about ibonds
« Reply #2 on: September 20, 2014, 11:27:41 AM »
You should try reading Rational Expectations by William Bernstein (free with Kindle Unlimited) for ideas on an appropriate portfolio for those nearing or in retirement. Think utilizing TIPS/Short Term Bonds/CD laddering for money you will need within the next 5 years. Better growth/inflation protection than a savings account, but not nearly the risk of equities.

FiveSigmas

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Re: Tell me about ibonds
« Reply #3 on: September 20, 2014, 04:10:37 PM »
The purpose/value of I bonds comes up frequently on the Bogleheads forum. For instance:

http://www.bogleheads.org/forum/viewtopic.php?f=1&t=138357&newpost=2046341

I like them as a substitute for TIPS. The fact that they are tax-deferred is, IMO, pretty attractive.

Note if you do purchase them, you can do so with a frequent-flyer or rewards credit card and get a nice compensation while saving the money.

Unfortunately, I don't think this is true any longer (although please correct me if I'm wrong -- I'd certainly take an extra 2%!)

fa

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Re: Tell me about ibonds
« Reply #4 on: September 20, 2014, 04:32:49 PM »
i-Bonds are limited to $10,000 per per per year I believe.  I am not aware that you can buy them with a credit card.  i-Bond have a better rate of return than TIPS.  The government knows it is a sweet deal since they limit you so much to how much you can buy.  However, they are not huge moneymakers in the current low inflation environment.  I primarily see them as a long term investment for the purpose of hedging against future inflation.

It is true that you can apply $5,000 of your IRS refund to purchasing ibonds.  I tried it this year and it did not work. :-(

HopetoFIRE

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Re: Tell me about ibonds
« Reply #5 on: September 20, 2014, 07:49:21 PM »
Yes, this will be something that will be the equivalent of our cash portfolio in retirement.  I figure we need to start buying them now since you would need to keep them for 5 years without jeopardizing the interest earned.  Yes, it would be $10k pp for my husband and me. 

You should try reading Rational Expectations by William Bernstein (free with Kindle Unlimited) for ideas on an appropriate portfolio for those nearing or in retirement. Think utilizing TIPS/Short Term Bonds/CD laddering for money you will need within the next 5 years. Better growth/inflation protection than a savings account, but not nearly the risk of equities.

It will be money we will use in the first few years of retirement in addition to dividends/withdrawal from our taxable accounts.  Our cash would represent a little than 10% of the whole portfolio.  It would be replenished as it is used from our investments depending on the market.  I will definitely looking Bernstein's recommendation though. 

FiveSigmas

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Re: Tell me about ibonds
« Reply #6 on: September 21, 2014, 01:03:50 AM »
It is true that you can apply $5,000 of your IRS refund to purchasing ibonds.  I tried it this year and it did not work. :-(

Oh no. What happened? I was hoping to use my refund to buy I-bonds next year, and I'd love to know if there are any pitfalls to avoid. The one hassle that I've heard is that the tax refund ones get delivered as paper bonds (http://www.irs.gov/Individuals/Now-you-can-buy-U.S.-Series-I-Savings-Bonds-for-anyone-with-your-tax-refund), but it looks like one can convert them to electronic after the fact (http://www.treasurydirect.gov/indiv/research/indepth/smartexchangeinfo.htm).

FiveSigmas

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Re: Tell me about ibonds
« Reply #7 on: September 21, 2014, 01:20:19 AM »
i-Bond have a better rate of return than TIPS.

They have a better return than short-term TIPS, but I think 10-year and 30-year TIPS edge them out (if you can allocate them in a tax-efficient account), so I think it depends on how long you plan to keep them. The following table lists the recent auctions:

http://treasurydirect.gov/instit/annceresult/annceresult.htm

The current fixed component for I-bonds is only 0.1%:

http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm

BTW: If you think you might not hold them to maturity, I-bonds also have the very nice property that you know ahead of time how much you can sell them for. TIPS, on the other hand, sell for whatever people are willing to pay on the exchange, which will decrease if interest rates start to rise.

robotclown

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Re: Tell me about ibonds
« Reply #8 on: September 21, 2014, 03:53:55 PM »
They're inflation-protected, and unlike TIPS, they're also deflation-protected.  TIPS can dip into negative interest rates, while I-bonds can't go below 0.  And since they're variable-duration bonds, they aren't as affected by interest rates swings like regular bonds.

If the bond is used for qualified education expenses for yourself, spouse, or dependent, itís tax exempt.  If you have kids or want to take any classes yourself, it's a nice bonus.

CorpRaider

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Re: Tell me about ibonds
« Reply #9 on: December 24, 2017, 04:11:17 PM »
Bump.  Don't forget to get your I bonds before year end, if you are potentially impacted by the maximum purchase limit.  I especially like them if one is running out of tax advantaged space.