Investing in I Bonds vs TIPS Index funds

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sman09
Posts: 479
Joined: Fri Mar 23, 2018 12:02 am

Investing in I Bonds vs TIPS Index funds

Post by sman09 »

Dear BHs

Appreciate your help with the below queries:

1. Is investing in TIPS funds/ETFs (e.g., VTIP e.r. 0.04 or SCHP e.r. 0.05) also a good option to consider instead of I Bonds for part of the bond component of one's portfolio?

2. We have some money (beyond emergency funds) in our checking account sitting idle for the last several years. Although we have been contributing actively to 401k for the last 3 years and started our Roth contribution last year, we have not been able to invest this money in our checking account, for various reasons - including not want to incur a sudden loss of value in case we were to plan some career changes, including an early retirement.

Given that this money is losing value to inflation, and also factoring in our need for liquidity, would it be reasonable to invest this money in a Bond fund in taxable?

we understand that it may not be a tax-efficient move and that the dividends would be subject to taxation at our marginal rate. But instead of losing about 2 to 5% of the value of the money each year, we would rather pay the tax on that part of the dividend. We are usually at a 22% marginal tax rate and this year will likely be at 24%.

At least the money is likely to earn more than what it would in a checking/savings account. If we do not do this, the money will likely continue to be in our bank account.

We were thinking of investing in TIPS and thought of getting BHs inputs before proceeding ahead. What would be some good Bond funds to consider for this purpose?

Thank you very much!
patrick
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Location: Mega-City One

Re: Investing in I Bonds vs TIPS Index funds

Post by patrick »

I Bonds have important advantages:

1. They have a higher current real yield. TIPS currently have a real yield less than zero.
2. They defer taxes until the bond is redeemed.
3. They have a 0% semi-annual floor, so will do even better than 0% real if there is intermittent deflation. TIPS also have a guarantee not to lose face value for the whole term, but that only applies in the extremely unlikely event of cumulative deflation over the bond's entire life.

Of course there is that pesky purchase limit, and also are required to hold I Bonds for one year, which means you can't/shouldn't move everything into them at once.
dbr
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Joined: Sun Mar 04, 2007 8:50 am

Re: Investing in I Bonds vs TIPS Index funds

Post by dbr »

1. Of course a TIPS fund is a reasonable asset to hold in a long term stock and bond portfolio, presumably with bonds in a tax deferred space.

2. Equally of course I bonds are perfectly reasonable for placing cash in a taxable portfolio, as you seem to have now.
cresive
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Re: Investing in I Bonds vs TIPS Index funds

Post by cresive »

sman09 wrote: Thu Jan 20, 2022 11:28 am Dear BHs

Appreciate your help with the below queries:

1. Is investing in TIPS funds/ETFs (e.g., VTIP e.r. 0.04 or SCHP e.r. 0.05) also a good option to consider instead of I Bonds for part of the bond component of one's portfolio?

2. We have some money (beyond emergency funds) in our checking account sitting idle for the last several years. Although we have been contributing actively to 401k for the last 3 years and started our Roth contribution last year, we have not been able to invest this money in our checking account, for various reasons - including not want to incur a sudden loss of value in case we were to plan some career changes, including an early retirement.

Given that this money is losing value to inflation, and also factoring in our need for liquidity, would it be reasonable to invest this money in a Bond fund in taxable?

we understand that it may not be a tax-efficient move and that the dividends would be subject to taxation at our marginal rate. But instead of losing about 2 to 5% of the value of the money each year, we would rather pay the tax on that part of the dividend. We are usually at a 22% marginal tax rate and this year will likely be at 24%.

At least the money is likely to earn more than what it would in a checking/savings account. If we do not do this, the money will likely continue to be in our bank account.

We were thinking of investing in TIPS and thought of getting BHs inputs before proceeding ahead. What would be some good Bond funds to consider for this purpose?

Thank you very much!
sman09,


From my reading of your post, you are looking for a safe, inflation-protected pot to put any extra savings after you have maxed out your 401K and Roth accounts. Unfortunately, bonds/bond funds are not a great pot to put your taxable savings into due to the yearly dividends that are treated as regular income. If you don't mind paying yearly taxes, that is not so much an issue. There are some tricks you can use, but they may not work for you as you seem to also want these funds to be readily available--i.e. part of your emergency fund.

If you can structure your fund balances in the following manner, you may be able to accomplish what you wish: 1. You can increase your bond fund allocation (both regular and TIPS) within your 401 or Roth accounts. This will allow you to increase your allocation into equities in a brokerage account, but maintain a healthy bond/equity asset allocation. If you need your funds during a bear market, you can tap your Roth account. If your brokerage is doing well, and you need the cash for moving or retiring, then you can cash out your equities and pay taxes on the increased value.

I do a variation of the above, but I include I-bonds as ballast for my equities in my brokerage fund. Since you are limited in I-bond purchase/year, it took me a while to build this up. During that period, I used my ROTH account as described above. I also used online savings accounts to hold a large portion of my EF. This isn't great, but at least I was receiving 1.5% returns while most savings were offering 0.05. Today, you may see .5% versus 0.002% returns in savings accounts. It isn't great, but it is something.

Hope that helps,
Ben
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