Gifting I-Bonds? Still buying I-Bonds?

[baconschteam]

My usual investment strategy is to dump everything I have into index funds, but the prospect of recession along with the pretty likely guaranteed inflation led me to make the decision to max out i-bonds early in the year. I thought I had maxed them out for the year for the wife and I, but just learned that you can purchase i-bonds as a gift for each other as well. At this point is seems like inflation might be cooling a bit - I can definitely see it in the housing market, and gas prices seem to have plateaued. So my question is, if you learned today that you could buy $20k more i-bonds, would you?

Not looking for answers like "What does your IPS say?", asking for people's opinion on whether or not i-bonds are still a good buy vs stocks.

Also, through this gifting, couldn't you potentially, with a group of trusty friends, purchase a much larger amount of i-bonds? I know that you can only "recieve" $10k total annually, but once the gift is purchased it starts collecting interest and then can be given at any future date, correct? Not that I would want $100k of i-bonds that could only be collected over 10 years, just asking if I'm correctly understanding how this works.

[park10]

from my reading it was clear to me that The $10k annual limit per ssn cannot be bypassed by gifting each other...

[seattlecyclone]

from my reading it was clear to me that The $10k annual limit per ssn cannot be bypassed by gifting each other...

I read there's a loophole where you can put in $10k as a gift for an as-yet-unnamed recipient, it starts earning interest right away, and then on January 1 when the person's annual limit resets you can complete the gifting process. I'm not personally messing with that.

[EvenSteven]

My usual investment strategy is to dump everything I have into index funds, but the prospect of recession along with the pretty likely guaranteed inflation led me to make the decision to max out i-bonds early in the year. I thought I had maxed them out for the year for the wife and I, but just learned that you can purchase i-bonds as a gift for each other as well. At this point is seems like inflation might be cooling a bit - I can definitely see it in the housing market, and gas prices seem to have plateaued. So my question is, if you learned today that you could buy $20k more i-bonds, would you?

If I had room in my tax advantaged accounts (like my Roth or 401k) I would fill those up before buying I-bonds. Also, I would not replace any of my desired stock allocation in my taxable accounts with I-bonds. If I had a cash allocation I think they are fantastic for that part as long as you can handle the lock out periods. I think they are also totally acceptable as part of your overall bond allocation, if you need to hold bonds in taxable.

Also, through this gifting, couldn't you potentially, with a group of trusty friends, purchase a much larger amount of i-bonds? I know that you can only "recieve" $10k total annually, but once the gift is purchased it starts collecting interest and then can be given at any future date, correct? Not that I would want $100k of i-bonds that could only be collected over 10 years, just asking if I'm correctly understanding how this works.

You don't need a group of trusted friends, as there is no limit on how much you can gift. So you and your spouse could gift each other $500,000 in a single year if you wanted to, although they could only be claimed 10k purchase amount per year.

[TomTX]

from my reading it was clear to me that The $10k annual limit per ssn cannot be bypassed by gifting each other...

Sort of. It doesn't allow any one SSN to increase their personal I-Bond holdings more than $10k per year of electronic* bonds. However, if you have a trusted partner the gifting method effectively lets you pre-purchase I-Bond capacity for future years.

This year, my spouse and I each bought $10k in I-Bonds, plus $10k in "gift" I-Bonds for each other. Total invested $40k.

Come January 1, we can transfer those gifts and thus use up our 2023 contributions. Or we can choose to let the gift amount sit in the gift box earning interest and directly buy an additional $10k each. Maybe we decide to transfer in 2024, or maybe we just buy more I-Bonds and continue to let it ride.  Unless you need to cash it out, there doesn't seem to be any significant downside to "let it ride".

*IRS refund method allows you to get an additional $5k in paper I-Bonds for your tax refund. Just be sure you're getting at least a $5k refund.

[Midwest_Handlebar]

We opted to buy $10k per spouse + $20k in "gifts" per spouse that we'll deliver in Jan 1 2023 and Jan 1 2024. The rationale is that if you buy the gift now for January 1 2024, you will receive 9.62% for 6 months + roughly 12% the next 6 months (based on recent CPI #'s). This will carry you into August 2023 with a great return and even if the return drops to 0%, you'll be able to cash out in Jan 1 2024 and pay the 3 month interest penalty (in this case it would be 0%). It's a great rate to lock in for the next 1.5 years on cash equivalent money.

[grantmeaname]

if you learned today that you could buy $20k more i-bonds, would you?

Not looking for answers like "What does your IPS say?", asking for people's opinion on whether or not i-bonds are still a good buy vs stocks.

For me, the answer is 'no, and hell no'. Bonds diversify stocks because if the real economy and corporate profits are weak, the Fed cuts interest rates to stimulate demand, and any existing bond with an interest rate already printed on it becomes worth more. Unlike TIPS or normal corporate bonds or treasuries, the principal of your I bonds and EE bonds does not adjust. They are effectively variable rate CDs, not bonds. They do not move inversely to interest rates, so they cannot help you in a recession. So when I'm already concerned that bonds don't do enough to diversify, along comes a trendy new "bond" that loses the one actually-helpful diversification feature of bonds! Nah, I'm good.

[LightStache]

I just don't buy them because I got locked out of my Treasury Direct account and it was impossible to get it unlocked. Evidently it happened to so many people they just did a massive one-time unlock. But it makes me nervous that I might run into operational problems when I need to liquidate them.

[lifeisshort123]

I have not been doing the gifting thing, but I have been buying them.  Not up to $10k yet, but still purchasing as I can.

[Kayad]

if you learned today that you could buy $20k more i-bonds, would you?

Not looking for answers like "What does your IPS say?", asking for people's opinion on whether or not i-bonds are still a good buy vs stocks.

For me, the answer is 'no, and hell no'. Bonds diversify stocks because if the real economy and corporate profits are weak, the Fed cuts interest rates to stimulate demand, and any existing bond with an interest rate already printed on it becomes worth more. Unlike TIPS or normal corporate bonds or treasuries, the principalof your I bonds and EE bonds does not adjust. They are effectively variable rate CDs, not bonds. They do not move inversely to interest rates, so they cannot help you in a recession. So when I'm already concerned that bonds don't do enough to diversify, along comes a trendy new "bond" that loses the one actually-helpful diversification feature of bonds! Nah, I'm good.

Maybe I’m misunderstanding what you are trying to say, but ibond principal does adjust/compound.

From treasury direct (https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm): “The interest is compounded semiannually:  twice a year, the interest the bond earned in the previous six months is added to the bond's principal value; then, interest for the next six months is calculated using this adjusted principal.”

[EvenSteven]

if you learned today that you could buy $20k more i-bonds, would you?

Not looking for answers like "What does your IPS say?", asking for people's opinion on whether or not i-bonds are still a good buy vs stocks.

For me, the answer is 'no, and hell no'. Bonds diversify stocks because if the real economy and corporate profits are weak, the Fed cuts interest rates to stimulate demand, and any existing bond with an interest rate already printed on it becomes worth more. Unlike TIPS or normal corporate bonds or treasuries, the principalof your I bonds and EE bonds does not adjust. They are effectively variable rate CDs, not bonds. They do not move inversely to interest rates, so they cannot help you in a recession. So when I'm already concerned that bonds don't do enough to diversify, along comes a trendy new "bond" that loses the one actually-helpful diversification feature of bonds! Nah, I'm good.

Maybe I’m misunderstanding what you are trying to say, but ibond principal does adjust/compound.

From treasury direct (https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm): “The interest is compounded semiannually:  twice a year, the interest the bond earned in the previous six months is added to the bond's principal value; then, interest for the next six months is calculated using this adjusted principal.”

I think they were talking about interest rate risk, not compounding. It's true that I bonds are not subject to interest rate risks (when rates go up, price goes down. when rates go down, price goes up). I don't think it is true that lacking sensitivity to interest rates is necessarily a bad thing.

[grantmeaname]

Maybe I’m misunderstanding what you are trying to say, but ibond principal does adjust/compound.

From treasury direct (https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm): “The interest is compounded semiannually:  twice a year, the interest the bond earned in the previous six months is added to the bond's principal value; then, interest for the next six months is calculated using this adjusted principal.”

No, I'm not talking about compound interest, I'm talking about changes in the market value of a bond as interest rates change - Bonds are securities and you can trade them, and I Bonds are not securities and you can't trade them. If you have a 10 year bond with 10% printed on the front of it, it becomes worth a lot more to a buyer if market interest rates move from 10% to 5% (like 40% more in this admittedly stylized example). The bond pays you if the Fed cuts rates to stimulate demand to forestall or soften a recession, and then when you rebalance you buy stocks for cheap. To the limited extent that stocks and bonds are negatively correlated, that's how it's supposed to work. I-bonds don't do that, and so they don't diversify stocks.

I don't think it is true that lacking sensitivity to interest rates is necessarily a bad thing.

Agreed. It's not necessarily a bad thing. If you want an emergency fund that doesn't lose to inflation, I bonds might be a good choice if you can get through the lock-in period. If you want to diversify a portfolio with a lot of stocks or real estate in it, I think they are a poor choice.

[EvenSteven]

I don't think it is true that lacking sensitivity to interest rates is necessarily a bad thing.

Agreed. It's not necessarily a bad thing. If you want an emergency fund that doesn't lose to inflation, I bonds might be a good choice if you can get through the lock-in period. If you want to diversify a portfolio with a lot of stocks or real estate in it, I think they are a poor choice.

I agree that they might be a poor choice in a given portfolio, and they are not a straight substitute for something like a long term bond fund.

The way I look at it is on the whole portfolio level. I-bonds are the lowest risk asset that I can think of. In my portfolio I want a certain amount of risk, and that can come from any combination and weight of assets. I don't see much difference between de-risking the fixed income portion of a portfolio by going from a long term bond fund to I-bonds, and then making that up by making some other part of my portfolio more risky. So I can still think of situations where they may be a reasonable choice as a part of a portfolio.

[grantmeaname]

I guess where I disagree is that when you cut down on a negatively correlated asset and replace it with an uncorrelated asset, your overall portfolio risk is increasing, not decreasing, even though that one asset is less risky.

[blue_green_sparks]

Yup, we decided to buy each other gifts before the November rate change as we both maxed out our 10k already. I just put some cash into a 2.55% no penalty CD, and oh well, I'll be closing that out real soon.