… Even the Wall Street Journal has finally realized the benefits of the I-series Savings Bond. (I hope that the Treasury Department doesn’t cancel this program.) However, every person (or trust) can only buy $10,000 per year of I-Bonds.
For WSJ readers, $800 in interest income on a $10,000 investment is probably lost in the round off. It’s probably not worth the time and effort to open a Treasury Direct account. The only reason I bought some [i-bonds] was because I already had a Treasury Direct account which holds the most poorly performing asset in my portfolio – i-bonds purchased about 26 years ago which have appreciated to a bit over twice their purchase price during that period. I would have had a small fortune had the i-bond money been in an index fund.
But sure, if you’ve got money sitting in a money market fund, and already have the Treasury Direct account, it makes sense to move $10,000 to i-bonds. It may even make sense to overpay your 4th Quarter estimated Federal Income Tax by $5,000 so that you’ll get a $5,000 IRS tax refund which can also go into i-bonds along with the original $10,000 limit. Well, maybe not once you see the rigamarole you have to go through to buy them through the IRS.
I know… cash loses value to inflation. But the smartest thing I’ve done with my sizable emergency cash pile over the last two years was to leave it in the money market. Cash can only lose value as fast as inflation. Same is not true with respect to most reasonable choices I would have had for that pile of money.
(Still down 25% from all time high in November in the IRA.)
< It’s probably not worth the time and effort to open a Treasury Direct account. >
Yes, it’s an effort to open a Treasury Direct account, which requires taking paperwork to the bank for a notary’s signature. I like that level of security.
Once that’s done, I and my husband can each buy $10,000 per year of I-Bonds. Any trust with a unique TIN can also buy $10,000. If I had kiddies, I could buy each of them $10,000 to be held UGMA. And this can be done every year.
It adds up.
Unless you are very wealthy, over the years the amounts involved can be significant. I think most METARs could potentially benefit. Safely and securely. For those who want assets outside of the stock market. Which is not always safe and secure.
Yes, it’s an effort to open a Treasury Direct account, which requires taking paperwork to the bank for a notary’s signature. I like that level of security.
Was not the case for us. Frankly, was so easy that I no longer remember what we had to do.
Once that’s done, I and my husband can each buy $10,000 per year of I-Bonds. Any trust with a unique TIN can also buy $10,000. If I had kiddies, I could buy each of them $10,000 to be held UGMA. And this can be done every year.
It adds up.
Unless you are very wealthy, over the years the amounts involved can be significant.
Absolutely! The $29,000 I have in i-bonds purchased in 1998 has grown to $73,000 – $29k in the S&P500 would be worth $146,000 today. I’ll leave it to the student to determine which bank balance offers more “safety”.
Yes, it’s an effort to open a Treasury Direct account, which requires taking paperwork to the bank for a notary’s signature. I like that level of security.
Was not the case for us. Frankly, was so easy that I no longer remember what we had to do.
Perhaps you’re misremembering that it required a signature guarantee?
Yes, it appears the Treasury Dept has streamlined the process to open a Treasury Direct account. I definitely had to get a signature guarantee when I opened one more than 20 years ago.
Even a simple S&P500 index fund has gained 63% over the past 24 months.
Thanks for the data point Maybe the start date (just post COVID scare) was a bit of a dip, but +63% over 2 years is not a sustainable rate. Nor, likely, is the level to which +63% in 2 years has brought the market … given the Fed pivot now in process.
Looking forwards from here, I’ll accept a little depreciation of cash while I wait for things to normalise - and maybe overshoot on the downside - in equities.
Ex-Treasury Secretary Larry Summers disagreed and predicted high inflation, based on the record huge amount of fiscal and monetary stimulus. — Summers was early and damning. But why he was so adamant is in the past as the FED has done an about face.
It has certainly already happened, but what Summers was warning about was not the Fed. It was about the final Covid relief package being much too large. Here is my link from February 2021:
https://discussion.fool.com/stimulus-too-big-34743562.aspx
First, while there are enormous uncertainties, there is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation…
Fed Chairman Jerome Powell said that it would be transitory
The “JCs” certainly seem to like the media’s constant “shortage” hype, leveraging it to only make the most expensive products available, and raising their price.
As offered before, labor unions don’t have the clout they had fifty years ago. Recent wage gains can be taken away in a flash. Maybe the “JCs” will pay off the media to start hyping a recession narrative to intimidate their employees to stay on, in the face of pay and benefit cuts?
Absolutely! The $29,000 I have in i-bonds purchased in 1998 has grown to $73,000 – $29k in the S&P500 would be worth $146,000 today. I’ll leave it to the student to determine which bank balance offers more “safety”.
I hope you’ve been paying taxes on the phantom income from those I-bonds throughout the years! Otherwise, come 2028, you may be screwed because $50-70k will be added to your income that year. I assume you may be on medicare by then, but if you were still on ACA, you might not be eligible for the [near] free plan that year.
Otherwise, come 2028, you may be screwed because $50-70k will be added to your income that year.
Do you have to redeem all of them at once?
Although you don’t gain anymore interest after 30 years, couldn’t you redeem something like half in 2028 and half in 2029…or 1/3 in 2028, 1/3 in 2029, 1/3 in 2030, etc.?
<I hope you’ve been paying taxes on the phantom income from those I-bonds throughout the years! >
Actually, I haven’t been since I thought that I could defer the interest distributions and gradually withdraw them after maturity (2031).
WRONG!!!
The ever-knowledgeable aj485 gave me a sharp wake-up call about 2 months ago.
Yikes!
I have started to pay taxes on the interest in 2021. I will have to pay taxes on the interest from now on. I will have to keep complete records so the IRS doesn’t charge taxes on interest which has already been paid from 2021 - 2031.
Many thanks to aj485 for saving me a huge tax hit in 2031.
Thank you, MarkR, for also pointing this out.
Incidentally, I’m age 68 and already on Medicare.
<Do you have to redeem all of them at once?
Although you don’t gain anymore interest after 30 years, couldn’t you redeem something like half in 2028 and half in 2029…or 1/3 in 2028, 1/3 in 2029, 1/3 in 2030, etc.?>
I bought a large amount of paper I-Bonds in 2001 which yield (3% + inflation). Since they are paper, I could redeem some of them before their 30-year maturity but I would rather pay the taxes and keep them churning out the interest. The amount of interest is so large that it’s better to spread out the taxes over 10 years.
I also have electronic I-Bonds from Treasury Direct. I’m not sure about the partial redemption and taxation of those. But I do intend to pay the taxes on the interest.
"When must I report the interest on my tax form?
You have a choice. You can
report the interest every year
put off (defer) reporting the interest until you file a federal income tax return for the year in which the first of these events occurs:
you cash the bond and receive what the bond is worth, including the interest, or
you give up ownership of the bond and the bond is reissued, or
the bonds stops earning interest because it has reached final maturity"
Once upon a time, you could get $30K in paper bonds and $30K in electronic bonds…that era is long over.
Now it’s just 10K/yr…or 15K maybe if you use your tax return refund…
I’ve got an I-bond or two…and when they mature, will take the hit but still in low 20% bracket. … but tax bracket a lot lower now that was working and bought them - and for the next 10 years.
<<Absolutely! The $29,000 I have in i-bonds purchased in 1998 has grown to $73,000 – $29k in the S&P500 would be worth $146,000 today. I’ll leave it to the student to determine which bank balance offers more “safety”.
I hope you’ve been paying taxes on the phantom income from those I-bonds throughout the years! Otherwise, come 2028, you may be screwed because $50-70k will be added to your income that year. I assume you may be on medicare by then, but if you were still on ACA, you might not be eligible for the [near] free plan that year.
I haven’t been paying phantom Federal income taxes, but I do have the maturity of the i-bonds in my tax plan going forward.
Since I turned 65 last year and no longer have to worry about the ACA income limits, I’ve been doing an annual Roth conversion to top off my target income tax bracket. In the years I have a tranch of i-bonds maturing, I’ll just be making a slightly smaller Roth conversion.
Congress is currently working on legislation that will increase the age for starting RMDs to 75, so that helps, too. The last i-bond matures when I’m 71.
The ever-knowledgeable aj485 gave me a sharp wake-up call about 2 months ago.
Yikes!
I have started to pay taxes on the interest in 2021. I will have to pay taxes on the interest from now on. I will have to keep complete records so the IRS doesn’t charge taxes on interest which has already been paid from 2021 - 2031.
I was trying to find out more about this yesterday, and could find nothing other than if you decide to declare the phantom interest every year for one bond, then you had to do it for all of the bonds that you hold and for all the accrued interest in arrears. I don’t see anything about if you chose to redeem a bond in any given year stating that you then needed to be taxed on the accrued interest from all your other bonds as well.
I am sure AJ provided links at the time, but as usual the TMF search function is worthless. Can one not simply start liquidating a portion of their bonds annually?
Maybe the start date (just post COVID scare) was a bit of a dip, but +63% over 2 years is not a sustainable rate. Nor, likely, is the level to which +63% in 2 years has brought the market … given the Fed pivot now in process.