The Money Mustache Community
Learning, Sharing, and Teaching => Taxes => Topic started by: daymare on October 03, 2015, 02:03:57 PM
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I feel somewhat ridiculous asking this, as I generally am confident in my investing abilities and knowledge (or ability to research what I don't know), but I've never dealt with individual bonds and paying taxes on them - currently all other bond investments are in funds, not individual bonds, and these funds are in tax-exempt or tax-deferred accounts.
My husband has several Series EE bonds his mother bought for him when he was younger - all from 1991-1995, paying fixed 4%, and with maturities in 2021-2025 (30 years duration). The total value of these bonds is $3,206.88, and the total interest (so far) is $2,081.88.
I'm considering redeeming these bonds and buying more VTSAX (US stock market index - .05% ER) in our taxable investment account. From what I understand, we need to pay federal taxes on the interest earned when we redeem. (I believe that since these were bought for half of face value, we receive the full current value of the bonds when they are redeemed.) Other relevant info: Our income this year (married, filing jointly) is around 100K (hard to say exactly, had payout from my old employer's stock, not sure how that's taxed), less 18K for Trad 401k, so taxable income around 82K. Next year's income will be larger, probably 120-140K. But we'll hopefully both have 401ks, and will probably switch to Trad IRAs instead of Roths, so taxable income would be 73-93K. Basically, we may edge into the 25% marginal tax bracket, but be on the lower end.
I feel that a 4% risk-free return is pretty good, but I think it's a good time to invest more in stocks. We've pretty much hit our limit on what we can invest this year (50K), so redeeming would give us a couple thousand more to invest. The amount is probably small enough to not matter much, plus our taxable income next year isn't clear and may or may not be similar.
Any thoughts on this situation (that I'm probably overthinking)? Anything I should consider, resources I should read, anything I am misinformed on?
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I guess I should clarify that by 'it's a good time to invest more in stocks', I'm not trying to be an uber market timer, just that it's generally always a good time to invest in stocks (invest early and often, all that) when you're in it for the long term and there's been a slight dip that makes me wish I could invest more this month.
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Perhaps overthinking...
4% guaranteed, I'd keep them until maturity myself.
I'm assuming you've used the Treasury Direct (https://www.treasurydirect.gov/BC/SBCPrice) site to figure the value and maturity date of each bond? There's more info on taxes and such on that site as well.
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Perhaps overthinking...
4% guaranteed, I'd keep them until maturity myself.
I'm assuming you've used the Treasury Direct site to figure the value and maturity date of each bond? There's more info on taxes and such on that site as well.
Yup, spent some time on there this morning, that's indeed where all the numbers are from. Thanks for the input! You're right that a guaranteed 4% is pretty great. I get such a kick out of increasing my investments, but maybe I should just add that to our investment total and keep the bonds and get my thrill that way. I'll sleep on it.
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1) 4% is really damn good for a US Government bond.
2) There are ways to avoid paying the income tax when you do cash a savings bond. For example, using the proceeds for approved education.
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@tomtx, where can you find the approved uses? We did sone research before cashing in a few with really low interest, but have more left
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Funny, I have EE bonds with almost the exact same issue dates and value. I was just researching them. Since my wife is still in school, I will probably just let them go to the last semester and then pay for that, because the lack of taxes will be worth any remaining interest. The funny thing is they were supposed to pay for my education, but the last one will pay interest until 2031, which is almost long enough to pay for my future children's education.
Smalllife: As far as I know education is the only tax-free event. You can, naturally, google EE bonds.
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I'd keep them not only is 4% a pretty good return, remember the taxes are deferred which increases the effective yield. Also, be on the lookout for an opportunity to cash them in for an educational purpose, education is defined fairly broadly. I used mine to pay for my online certified financial plan course. I never finished the course so it took some of the sting out of wasting the money paying for it with EE bonds.
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smalllife - here's where I read up on the education exclusion (excluding bond income if it's used for education) : https://www.treasurydirect.gov/indiv/planning/plan_education.htm
I definitely won't be in school again (finishing master's now), but my husband was considering taking some classes to get his master's in the next few years. I'm not sure about this requirement: "You must be at least 24 years old on the first day of the month in which you bought the bond(s)." Husband's mother bought these when he was <10 years old, so not sure if he could still use the bonds this way.
I'd keep them not only is 4% a pretty good return, remember the taxes are deferred which increases the effective yield. Also, be on the lookout for an opportunity to cash them in for an educational purpose, education is defined fairly broadly. I used mine to pay for my online certified financial plan course. I never finished the course so it took some of the sting out of wasting the money paying for it with EE bonds.
Am I reading this correctly, you used them to pay for your CFP online education modules? This is verrrrry interesting, as I'm actually planning to take them and go for my CFP. I'm going to do more research, as this could be amazing!
Anyway, update on my situation: turns out that now that we've finished maxing out my husband's 401k for the year, we're cash flow positive (spending is less than his take-home), so I bought some more stocks for our taxable account from cash, which makes me happy because I'd love to have investments greater than spending every month. And now I'm super glad that I didn't do anything yet, because someone mentioned that the educational component is pretty broad. If I can use it for CFP online courses, that would be amazing. I'm really wary of spending a bunch of money in pursuit of a job (couple thousand, probably), but if we can use this money that we never really knew about, that would be so much easier emotionally. Irrational, sure. Thanks everyone, I've got some research to do!