Series I Savings Bonds Reminder

[Edubb20]

As someone who has been following MMM forum for 6+ years, I managed to gloss over Series I Savings Bonds when they would pop up in discussions.

For all of you new to FIRE out there wonder where to stash an emergency fund, in my opinion, Series I Savings Bonds are it. Combination fixed/ inflation adjusted variable rate(variable rate locked in 6 months at a time). Currently at 0% fixed 3% adjusted. As close to no risk as you can get. 10k Max contributions per year.  Lose small amount(3 months) of interest after 1 year if you withdraw and lose no interest after 5 years.

I broke my original cash EF into a very small rainy day fund and an EF located in Series I Savings Bonds.

[dandarc]

The fixed component "floor" is currently zero percent - the 3.54% annual rate is entirely the inflation component which adjusts every 6 months.

So you're locking in a decent-ish rate of return for 6 months, could be higher or lower for the next six months depending on future inflation rate. Money is locked up for a year, 5 years to withdraw penalty free (it is a fairly minimal penalty).

[dandarc]

*that is not to say it is a bad place to park EF - if you can weather that first year, you'll likely do better than a savings or checking account. Just pointing out the "floor" on the interest rate is zero percent, not >3%. That's actually the case even if you have a non-zero fixed component - in deflationary times they do take negative inflation rate into account, but there is a floor of zero on the interest paid.

[pasadenafr]

I held off on them for years because the fixed rate has been 0 (or near-zero) for a long time, and the variable rate wasn't good either. I just jumped on the I-Bonds train last month and bought $10k off my emergency fund. I'll probably buy another $10k next year. I'll keep them until the variable rate goes back down under HYSA rates - which I'm not expecting to happen soon.

[Edubb20]

The fixed component "floor" is currently zero percent - the 3.54% annual rate is entirely the inflation component which adjusts every 6 months.

So you're locking in a decent-ish rate of return for 6 months, could be higher or lower for the next six months depending on future inflation rate. Money is locked up for a year, 5 years to withdraw penalty free (it is a fairly minimal penalty).

Thanks for clarifying the adjusted rate. The way I wrote it is misleading. Will edit!

[Padonak]

How are they taxed? Do you pay any taxes before you sell them?

[EvenSteven]

How are they taxed? Do you pay any taxes before you sell them?

They are state and local tax free and federal tax deferred. So you pay federal taxes only when you sell.

[seattlecyclone]

How are they taxed? Do you pay any taxes before you sell them?

They are state and local tax free and federal tax deferred. So you pay federal taxes only when you sell.

And if you happen to sell in a year in which you pay college tuition (or make 529 contributions) for yourself or your dependents, and your income is below $153k (MFJ) or $97k (filing alone), you can avoid even this tax.

[Radagast]

Yup, savings bonds are the best deal out there in the bond world now. Also look into EE savings bonds, if you have a bond allocation you are certain you will keep but not touch for 20 years. EE yield 3.5%, but they do nothing at all for 20 years and then double. Still, 3.5% is twice the rate of a 20 year vanilla treasury bond right now, and also nearly double a 20 year mortgage. Certainly much higher than any mortgage. It is highly unlikely any bond will out perform EE bonds (the most likely are extreme funds like EDV, series I savings bonds, and of course junk bonds). Here is a table showing what the EE bonds effective rate is. As the maturity date approaches, the yield to maturity increases rapidly, which is why there is so little chance of another bonds doing better even if rates go up by a lot.

Year YTM
1 3.53%
2 3.72%
3 3.93%
4 4.16%
5 4.43%
6 4.73%
7 5.08%
8 5.48%
9 5.95%
10 6.50%
11 7.18%
12 8.01%
13 9.05%
14 10.41%
15 12.25%
16 14.87%
17 18.92%
18 25.99%
19 42.42%
20 100.00%

That said, for 20 years I'd rather go for stocks.

[Car Jack]

iBonds are an excellent emergency fund.  You really need to compare it to HYSA and CDs.  People who say "I can make more stuffing the money into VTI", that isn't an EF.  That's normal investing and if we have another 2008, it is not protected.

On the iBond side, you can not only buy $10k per person per year electronic, you can also take $5k in paper bonds as a Federal tax refund. 

Savings bonds were really my first investment beyond my 401k.  I'm holding $400k in paper bonds.  I can cash bonds at DCU (my credit union) and before I leave the branch, the money is available for withdrawal.  Faster than any of my HYSAs can offer.  And as mentioned, no state or local tax ever and you pay federal tax only when you cash them.  If you stay paper, they won't be auto cashed, generating tax liability ever.

A really extreme example:  DWs grandparents always bought savings bonds, because back then, that's what people did.  They never cashed any of them.  Their only heir just died (DW's aunt).  Beneficiaries are DW and her sister.  DW is executor.  No tax has ever been paid.  Once DW gets EINs for both the grandparent and aunt's estate (DW is now executor of the re-opened grandparent estate), the bonds will be cashed and tax due from the estate.  The oldest bond in the bundle?  1943.  Cool story, bro, eh?

[bacchi]

The oldest bond in the bundle?  1943.  Cool story, bro, eh?

! Those war bonds stopped paying interest decades ago.

[seattlecyclone]

The oldest bond in the bundle?  1943.  Cool story, bro, eh?

! Those war bonds stopped paying interest decades ago.

Also your belief that you can defer tax on matured bonds until you cash them in is incorrect. You must pay tax on interest on the earlier of the date when you cash the bond in, or the final maturity date. See Publication 550 for the official source on this.

[cl_noll]

Personally, I regret the fact that I've kept $12.5k in I-bonds for the last four or so years in my early accumulation days, much of that time with rates well below 3%. Easily lost out on a good $7k+ in returns to date, and only have about $1k to show for it in I-bond interest. Should have been less afraid. Yes, I realize "something could have happened". Oh well.

[Car Jack]

I know you're required to pay taxes.  I can't force the grandfather (dead for 23 years) or aunt who inherited these (dead since last year) or grandmother, who's also on the bonds (dead for 33 years) to pay squat.  I expect their estates, who DW is now executor of will be paying all this.  I know after 30 years, they paid no more interest.  I have no control over what these people did. 

[seattlecyclone]

I know you're required to pay taxes.

I interpreted the below-quoted statement to mean you thought otherwise. Sorry for any misunderstanding.

As to your grandparents specifically, if they were supposed to pay tax decades ago the statute of limitations has long passed so I guess they probably just get away with it.

And as mentioned, no state or local tax ever and you pay federal tax only when you cash them.  If you stay paper, they won't be auto cashed, generating tax liability ever.

[EvenSteven]

Personally, I regret the fact that I've kept $12.5k in I-bonds for the last four or so years in my early accumulation days, much of that time with rates well below 3%. Easily lost out on a good $7k+ in returns to date, and only have about $1k to show for it in I-bond interest. Should have been less afraid. Yes, I realize "something could have happened". Oh well.

I look at those as two different questions:

1) Should I have an emergency fund?
2) Where should I keep my emergency fund?

I think the answer to #1 is highly dependent on one's personal financial and life situation, and can be reasonably answered as yes or no. But the answer to #2 probably shouldn't be VTI or some other equally volatile investment vehicle.

[Padonak]

Personally, I regret the fact that I've kept $12.5k in I-bonds for the last four or so years in my early accumulation days, much of that time with rates well below 3%. Easily lost out on a good $7k+ in returns to date, and only have about $1k to show for it in I-bond interest. Should have been less afraid. Yes, I realize "something could have happened". Oh well.

Yeah, and lost out on billions because I didn't invest in Bitcoin 10 years ago. Hindsight is great, isn't it.