Thanks, this is an extremely helpful analysis. I'm surprised that Roth and IRA's are indeed better in these cases.#Cruncher wrote: ↑Sat May 27, 2023 11:47 pmI often hear on the forum that I Bonds (and EE Bonds) "extend your tax-deferred space". This is only partially true. I Bonds get better tax treatment than a regular taxable account; but not as good as a Roth or Traditional IRA. To show this, I've extended ( ) the table from the 2014 post exodusing references to include an I Bond having a 0% fixed rate to match the assumed 0% real yield of the TIPS in the Roth, TIRA, and Taxable cases.oxothuk wrote: ↑Sat May 27, 2023 7:06 pmThat's the beauty of I-bonds. They are a great way to extend your tax-deferred space.dcabler wrote: ↑Sat May 27, 2023 5:58 pmYep - things would need to get pretty hosed in my portfolio for me to hold any otherwise taxable bonds in anything but my IRA. ...exodusing wrote: ↑Sat May 27, 2023 11:29 am Since taxes are a consideration, here's a post by #cruncher on why it's better to hold TIPS in an IRA than in taxable. viewtopic.php?p=2100674#p2100674 ...
Note that the I Bond's performance for both 2% and 5% inflation is better than Taxable but worse than either IRA. And like the Taxable case, its real after tax return deteriorates as inflation increases -- unlike the case with the Roth or traditional IRA.If you wish to duplicate the calculations with other assumptions: Select All, Copy, and Paste [*] the following at cell A1 of an empty Excel sheet:Code: Select all
Pretax wages 1,000 Years 30 Federal tax 25% State tax 5% Roth IRA Trad IRA Taxable I Bonds ------------ ------------ ------------ ------------ CPI Annual Change 2.00% 5.00% 2.00% 5.00% 2.00% 5.00% 2.00% 5.00% a Growth Rate 2.00% 5.00% 2.00% 5.00% 1.50% 3.75% 2.00% 5.00% b After Tax Investment 700 700 1,000 1,000 700 700 700 700 c Grows To 1,268 3,025 1,811 4,322 1,094 2,112 1,268 3,025 d Tax at End - - 543 1,297 - - 67 506 e After Tax 1,268 3,025 1,268 3,025 1,094 2,112 1,201 2,519 f Real After Tax 700 700 700 700 604 489 663 583
* If you have trouble pasting, try "Paste Special" and "Text".Code: Select all
Pretax wages 1000 Years 30 Federal tax 0.25 State tax 0.05 Roth IRA Trad IRA Tax able I Bonds CPI Annual Change 0.02 0.05 =B6 =C6 =D6 =E6 =F6 =G6 a Growth Rate =B6 =C6 =D6 =E6 =F6*(1-$B3) =G6*(1-$B3) =H6 =I6 b After Tax Investment =$B1*(1-$B3-$B4) =$B1*(1-$B3-$B4) =$B1 =$B1 =$B1*(1-$B3-$B4) =$B1*(1-$B3-$B4) =$B1*(1-$B3-$B4) =$B1*(1-$B3-$B4) c Grows To =B8*(1+B7)^$B2 =C8*(1+C7)^$B2 =D8*(1+D7)^$B2 =E8*(1+E7)^$B2 =F8*(1+F7)^$B2 =G8*(1+G7)^$B2 =H8*(1+H7)^$B2 =I8*(1+I7)^$B2 d Tax at End 0 0 =D9*($B3+$B4) =E9*($B3+$B4) 0 0 =$B3*(H9-$B1) =$B3*(I9-$B1) e After Tax =B9-B10 =C9-C10 =D9-D10 =E9-E10 =F9-F10 =G9-G10 =H9-H10 =I9-I10 f Real After Tax =B11/(1+B6)^$B2 =C11/(1+C6)^$B2 =D11/(1+D6)^$B2 =E11/(1+E6)^$B2 =F11/(1+F6)^$B2 =G11/(1+G6)^$B2 =H11/(1+H6)^$B2 =I11/(1+I6)^$B2
However, for someone like me who's alternative is having no tax deferred space at all, I Bonds are pretty darn good. They also have the advantage vs IRA's of being redeemable at any time, not being subject to RMD's, and of course the all-valuable option to put at par. Not sure how to quantify these advantages, but tax-wise the ability to redeem at any time gives the I Bond holder much more flexibility to manage his tax liabilities.
An I Bond holder under age 59 can choose to redeem his all I Bonds in a year where tax losses might offset any gains. You can't do that with TIPS in an IRA.
In a way, I think you’re comparing apples and oranges; for many, putting money in an IRA vs. buying I Bonds is not an “either or” proposition. If you have the ability to fund an IRA you’re going to use it, whether you buy TIPS or not.