I-bonds at 0.9% vs. TIPS at ~ 1.4% (taxable)?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
protagonist
Posts: 9277
Joined: Sun Dec 26, 2010 11:47 am

I-bonds at 0.9% vs. TIPS at ~ 1.4% (taxable)?

Post by protagonist »

For someone in the 22% marginal tax bracket, in a taxable account, which would you choose?
I-bonds yielding 0.9%?
or TIPS maturing in 2033 yielding ~1.4%? (the current situation).

Or a more general question... how great a "yield gap" would you require to convince you not to buy I-bonds in a given year but to put the funds in TIPS instead?
User avatar
jeffyscott
Posts: 13484
Joined: Tue Feb 27, 2007 8:12 am

Re: I-bonds at 0.9% vs. TIPS at ~ 1.4% (taxable)?

Post by jeffyscott »

For 10 years, the TIPS looks like the better choice. There's a good summary for a similar choice here: viewtopic.php?p=7242042#p7242042
grabiner wrote: Fri Apr 28, 2023 9:20 pm The May I-Bond fixed rate is set at 0.9%. 20-year TIPS yield 1.39%, and 30-year TIPS yield 1.51%.

So, redoing my calculation from the first post, suppose that inflation is 3% (the actual yield curve predicts a slightly lower rate). In a 24% tax bracket, the 30-year TIPS will return 4.51% pre-tax, which is 3.43% after tax. The 20-year TIPS will return 3.35%. The 30-year I-Bond will grow from $10,000 to $31,511, which becomes $26,349 after tax, a 3.28% annualized return. The 20-year I-Bond will return 3.19%.

So TIPS are only slightly ahead of I-Bonds given these assumptions. The advantage of TIPS will be slightly higher if inflation is lower, while I-Bonds have the advantage if you can postpone the taxes until a year that you are in a lower tax bracket. And I-Bonds do have the risk reduction advantage that they can be cashed in at any time at par value, while TIPS have some risk of loss from rising yields if you need the money earlier than planned.

Conclusion: if you are in a moderate bracket, and are investing for a very long term, I-Bonds may be slightly better than TIPS in a taxable account. However, TIPS in an IRA and stocks in taxable are probably still better than stocks in an IRA and I-Bonds in taxable. If you are in a high bracket but will not be spending the money until retirement in a lower bracket, then the tax deferral on I-Bonds is more valuable, which makes I-Bonds in taxable particularly attractive.
Since you're looking at 10 years, that would put the TIPS ahead by a bit more than the 20 year analysis above. TIPS at 1.4% with 3% inflation and 22% tax would yield 3.432%. A $10 K I-bond would grow to $14,661 in 10 years and $1025 in tax would make the net $13,636, for an after-tax return of about 3.15%.

But, as noted in the conclusion above, the even better option is probably stocks in taxable and TIPS in IRA.
Topic Author
protagonist
Posts: 9277
Joined: Sun Dec 26, 2010 11:47 am

Re: I-bonds at 0.9% vs. TIPS at ~ 1.4% (taxable)?

Post by protagonist »

jeffyscott wrote: Thu Jun 01, 2023 9:42 am For 10 years, the TIPS looks like the better choice. There's a good summary for a similar choice here: viewtopic.php?p=7242042#p7242042
grabiner wrote: Fri Apr 28, 2023 9:20 pm The May I-Bond fixed rate is set at 0.9%. 20-year TIPS yield 1.39%, and 30-year TIPS yield 1.51%.

So, redoing my calculation from the first post, suppose that inflation is 3% (the actual yield curve predicts a slightly lower rate). In a 24% tax bracket, the 30-year TIPS will return 4.51% pre-tax, which is 3.43% after tax. The 20-year TIPS will return 3.35%. The 30-year I-Bond will grow from $10,000 to $31,511, which becomes $26,349 after tax, a 3.28% annualized return. The 20-year I-Bond will return 3.19%.

So TIPS are only slightly ahead of I-Bonds given these assumptions. The advantage of TIPS will be slightly higher if inflation is lower, while I-Bonds have the advantage if you can postpone the taxes until a year that you are in a lower tax bracket. And I-Bonds do have the risk reduction advantage that they can be cashed in at any time at par value, while TIPS have some risk of loss from rising yields if you need the money earlier than planned.

Conclusion: if you are in a moderate bracket, and are investing for a very long term, I-Bonds may be slightly better than TIPS in a taxable account. However, TIPS in an IRA and stocks in taxable are probably still better than stocks in an IRA and I-Bonds in taxable. If you are in a high bracket but will not be spending the money until retirement in a lower bracket, then the tax deferral on I-Bonds is more valuable, which makes I-Bonds in taxable particularly attractive.
Since you're looking at 10 years, that would put the TIPS ahead by a bit more than the 20 year analysis above. TIPS at 1.4% with 3% inflation and 22% tax would yield 3.432%. A $10 K I-bond would grow to $14,661 in 10 years and $1025 in tax would make the net $13,636, for an after-tax return of about 3.15%.

But, as noted in the conclusion above, the even better option is probably stocks in taxable and TIPS in IRA.
Thanks, jeffy and grabiner, for doing that!
Yes, TIPS are better in IRA (my entire IRA will hopefully be invested in TIPS by the end of this year), but I have more fixed income funds than I have total funds in my IRA, so the overflow is being invested in I-bonds and TIPS in taxable.
I think what I might do, under the circumstances, may be to buy my annual limit ($20K) in I-bonds while the 0.9% rate still stands and put the rest into TIPS. If the bottom line is pretty close, that will also buy me flexibility.
Does that make sense to you?
User avatar
#Cruncher
Posts: 3977
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: I-bonds at 0.9% vs. TIPS at ~ 1.4% (taxable)?

Post by #Cruncher »

protagonist wrote: Thu Jun 01, 2023 5:38 amFor someone in the 22% marginal tax bracket, in a taxable account, ... [with] I-bonds yielding 0.9% ... how great a "yield gap" would you require to convince you not to buy I-bonds in a given year but to put the funds in TIPS instead?
For an assumed 22% tax rate and 3% annual inflation, TIPS would need to yield 1.035% to break even after taxes with a 0.9% fixed rate I Bond over 10 years. [1] The tax deferral of I Bonds becomes more valuable over time, so as shown in row 10 below, TIPS would need to yield 1.164% to break even over 20 years, and 1.273% over 30 years.

Code: Select all

Row                  Col A    Col B    Col C    Col D  Formula in Column B
  2             Investment   10,000
  3               Tax rate      22%
  4      I Bond fixed rate     0.9%
  5              Inflation     3.0%
  6  I Bond pre tax growth   3.927%                    =(1+B4)*(1+B5)-1
  7                  Years       10       20       30
  8        I Bond grows to   14,699   21,606   31,758  =$B2*(1+$B6)^B7
  9       I Bond after tax   13,665   19,052   26,971  =B8-$B3*(B8-$B2)
 10   Breakeven TIPS yield   1.035%   1.164%   1.273%  =((B9/$B2)^(1/B7)-$B3)/(1+$B5)/(1-$B3)-1
 11  TIPS after tax growth   3.172%   3.276%   3.363%  =((1+B10)*(1+$B5)-1)*(1-$B3)
 12          TIPS grows to   13,665   19,052   26,971  =$B2*(1+B11)^B7
 13         TIPS vs I Bond        0        0        0  =B12-B9
To do the above calculation with other assumptions in cells B3:B5 and B7: Select All, Copy, and Paste [2] the following at cell A1 of a blank Excel sheet.

Code: Select all

Col A	Col B
Investment	10000
Tax rate	0.22
I Bond fixed rate	0.009
Inflation	0.03
I Bond pre tax growth	=(1+B4)*(1+B5)-1
Years	10
I Bond grows to	=$B2*(1+$B6)^B7
I Bond after tax	=B8-$B3*(B8-$B2)
Breakeven TIPS yield	=((B9/$B2)^(1/B7)-$B3)/(1+$B5)/(1-$B3)-1
TIPS after tax growth	=((1+B10)*(1+$B5)-1)*(1-$B3)
TIPS grows to	=$B2*(1+B11)^B7
TIPS vs I Bond	=B12-B9
  1. To simplify things, I'm ignoring the different lag in applying the CPI to I Bonds and TIPS. I'm also ignoring the boost I Bonds would get from their 0% floor on the composite rate should the CPI decline more than 0.45% over any 6 months March-September or September-March.
  2. If you have trouble pasting, try "Paste Special" and "Text".
ThisTimeItsDifferent
Posts: 333
Joined: Sat Jan 31, 2015 1:51 pm

Re: I-bonds at 0.9% vs. TIPS at ~ 1.4% (taxable)?

Post by ThisTimeItsDifferent »

I really like the "put" option on I Bonds, that one can redeem them for the accrued value, after 1 year anyway, even if interest rates have risen and the values of marketable securities, like TIPS, have fallen.
User avatar
jeffyscott
Posts: 13484
Joined: Tue Feb 27, 2007 8:12 am

Re: I-bonds at 0.9% vs. TIPS at ~ 1.4% (taxable)?

Post by jeffyscott »

protagonist wrote: Thu Jun 01, 2023 10:45 am I think what I might do, under the circumstances, may be to buy my annual limit ($20K) in I-bonds while the 0.9% rate still stands and put the rest into TIPS. If the bottom line is pretty close, that will also buy me flexibility.
Does that make sense to you?
Based on #cruncher's post it looks like the "cost" of that might be around 0.5% per year for a 10-20 year holding period. For $20K, that would mean about $100 per year in foregone income, or around $80 after tax.

I'd call that cost high on a percentage basis (think of it as equivalent to an ER of 0.5%), but negligible on an absolute basis (~$80 per year).
User avatar
#Cruncher
Posts: 3977
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: I-bonds at 0.9% vs. TIPS at ~ 1.4% (taxable)?

Post by #Cruncher »

jeffyscott wrote: Thu Jun 01, 2023 1:16 pm
protagonist wrote: Thu Jun 01, 2023 10:45 amI think what I might do, under the circumstances, may be to buy my annual limit ($20K) in I-bonds while the 0.9% rate still stands ...
Based on #cruncher's post it looks like the "cost" of that might be around 0.5% per year for a 10-20 year holding period. For $20K, that would mean about $100 per year in foregone income, or around $80 after tax.
When I plug 1.4% into my spreadsheet above (overwriting the formula for the breakeven TIPS yield), I show the TIPS growing to $786 more after tax over ten years -- almost exactly the same as your $80 per year!

However, over twenty years assuming a 1.7% yield (about what the Feb 2043 was yielding Wednesday on WSJ TIPS Quotes), the TIPS does $3,304 better or about $165 per year.

Code: Select all

Row                  Col A    Col B    Col C  Formula in Column B
  2             Investment   20,000
  3               Tax rate      22%
  4      I Bond fixed rate     0.9%
  5              Inflation     3.0%
  6  I Bond pre tax growth   3.927%           =(1+B4)*(1+B5)-1
  7                  Years       10       20
  8        I Bond grows to   29,398   43,211  =$B2*(1+$B6)^B7
  9       I Bond after tax   27,330   38,105  =B8-$B3*(B8-$B2)
 10             TIPS yield   1.400%   1.700%
 11  TIPS after tax growth   3.465%   3.706%  =((1+B10)*(1+$B5)-1)*(1-$B3)
 12          TIPS grows to   28,116   41,408  =$B2*(1+B11)^B7
 13         TIPS vs I Bond      786    3,304  =B12-B9
abc132
Posts: 2435
Joined: Thu Oct 18, 2018 1:11 am

Re: I-bonds at 0.9% vs. TIPS at ~ 1.4% (taxable)?

Post by abc132 »

The best-case use for I-bonds is
1) additional tax sheltered space desired
2) delay use until in a lower bracket

I need the additional space and I can spend my I-bonds post-retirement in 0%, 10%, 12%, or 22% brackets.

I-Bond analysis should consider the case of using a lower bracket. 529 use is also tax free.

I-Bonds at 0.9% actually beat TIPS at 1.4% if you hold for 10 years and use a 0% tax year for withdrawal, or if you use them for a 529 plan.

The higher inflation is the more the tax arbitrage helps I-Bonds over TIPS. Using the lower tax bracket, I-Bonds at 0.9% beat TIPS at 1.4% over 10 and 20 years when inflation is 4%.
User avatar
jeffyscott
Posts: 13484
Joined: Tue Feb 27, 2007 8:12 am

Re: I-bonds at 0.9% vs. TIPS at ~ 1.4% (taxable)?

Post by jeffyscott »

#Cruncher wrote: Thu Jun 01, 2023 1:49 pm
jeffyscott wrote: Thu Jun 01, 2023 1:16 pm
protagonist wrote: Thu Jun 01, 2023 10:45 amI think what I might do, under the circumstances, may be to buy my annual limit ($20K) in I-bonds while the 0.9% rate still stands ...
Based on #cruncher's post it looks like the "cost" of that might be around 0.5% per year for a 10-20 year holding period. For $20K, that would mean about $100 per year in foregone income, or around $80 after tax.
When I plug 1.4% into my spreadsheet above (overwriting the formula for the breakeven TIPS yield), I show the TIPS growing to $786 more after tax over ten years -- almost exactly the same as your $80 per year!

However, over twenty years assuming a 1.7% yield (about what the Feb 2043 was yielding Wednesday on WSJ TIPS Quotes), the TIPS does $3,304 better or about $165 per year.

Code: Select all

Row                  Col A    Col B    Col C  Formula in Column B
  2             Investment   20,000
  3               Tax rate      22%
  4      I Bond fixed rate     0.9%
  5              Inflation     3.0%
  6  I Bond pre tax growth   3.927%           =(1+B4)*(1+B5)-1
  7                  Years       10       20
  8        I Bond grows to   29,398   43,211  =$B2*(1+$B6)^B7
  9       I Bond after tax   27,330   38,105  =B8-$B3*(B8-$B2)
 10             TIPS yield   1.400%   1.700%
 11  TIPS after tax growth   3.465%   3.706%  =((1+B10)*(1+$B5)-1)*(1-$B3)
 12          TIPS grows to   28,116   41,408  =$B2*(1+B11)^B7
 13         TIPS vs I Bond      786    3,304  =B12-B9
Thanks for the correction. I had just used your
"TIPS would need to yield 1.164% to break even over 20 years" and yesterday's WSJ quote of about 1.68% to get the 0.5% approximate annual difference.
Topic Author
protagonist
Posts: 9277
Joined: Sun Dec 26, 2010 11:47 am

Re: I-bonds at 0.9% vs. TIPS at ~ 1.4% (taxable)?

Post by protagonist »

jeffyscott wrote: Thu Jun 01, 2023 3:01 pm
#Cruncher wrote: Thu Jun 01, 2023 1:49 pm
jeffyscott wrote: Thu Jun 01, 2023 1:16 pm
protagonist wrote: Thu Jun 01, 2023 10:45 amI think what I might do, under the circumstances, may be to buy my annual limit ($20K) in I-bonds while the 0.9% rate still stands ...
Based on #cruncher's post it looks like the "cost" of that might be around 0.5% per year for a 10-20 year holding period. For $20K, that would mean about $100 per year in foregone income, or around $80 after tax.
When I plug 1.4% into my spreadsheet above (overwriting the formula for the breakeven TIPS yield), I show the TIPS growing to $786 more after tax over ten years -- almost exactly the same as your $80 per year!

However, over twenty years assuming a 1.7% yield (about what the Feb 2043 was yielding Wednesday on WSJ TIPS Quotes), the TIPS does $3,304 better or about $165 per year.

Code: Select all

Row                  Col A    Col B    Col C  Formula in Column B
  2             Investment   20,000
  3               Tax rate      22%
  4      I Bond fixed rate     0.9%
  5              Inflation     3.0%
  6  I Bond pre tax growth   3.927%           =(1+B4)*(1+B5)-1
  7                  Years       10       20
  8        I Bond grows to   29,398   43,211  =$B2*(1+$B6)^B7
  9       I Bond after tax   27,330   38,105  =B8-$B3*(B8-$B2)
 10             TIPS yield   1.400%   1.700%
 11  TIPS after tax growth   3.465%   3.706%  =((1+B10)*(1+$B5)-1)*(1-$B3)
 12          TIPS grows to   28,116   41,408  =$B2*(1+B11)^B7
 13         TIPS vs I Bond      786    3,304  =B12-B9
Thanks for the correction. I had just used your
"TIPS would need to yield 1.164% to break even over 20 years" and yesterday's WSJ quote of about 1.68% to get the 0.5% approximate annual difference.
What a great resource!!
Thank you for running the numbers, cruncher and jeffyscott! :sharebeer
Today I redeemed all my I-bonds older than 5 years that are only getting 3.38% perhaps plus a bit (not the ones that are still getting 6.48% plus), and I am waiting for the proceeds to be transferred to Fidelity....Total prob. around $90-100K.
I am hoping they become available by Monday.
I agree with jeffyscott's assessment....if TIPS yields don't increase a fair amount by when the funds post (I think it is unlikely they will), I will probably buy my annual $20K I-bond allocation , even if it costs me $80/year pre-tax vs. buying all TIPS, for the additional flexibility. I will invest the rest (plus the proceeds of a matured CD when it becomes available) in my TIPS ladder.

Thanks again!
-protagonist[/quote]

Follow-up: I sold all of my I-bonds yielding 0-0.1% that were more than 5 years old that I purchased in May and June of prior years. I used the proceeds to buy TIPS in taxable maturing in 2031 and 2032, with yields hovering around 1.5%. I will probably buy more TIPS when I cash in I-bonds I purchased in July 2016 next month (when their rate readjusts). I didn't buy 2033 maturities... I am waiting until I receive proceeds from a matured CD in my IRA to buy 2033 TIPS because they have a higher coupon rate (so I can defer more tax).

I have $20K plus interest in I-bonds with low yields that I purchased in April 2012 that I will sell in October. I will then decide whether to buy more I-bonds at the 0.9% rate, or to wait until November if the new variable rate is higher, or to buy more TIPS, based on what TIPS are yielding at that time.

Thanks for your help.
Last edited by protagonist on Mon Jun 05, 2023 12:37 pm, edited 1 time in total.
User avatar
Mel Lindauer
Moderator
Posts: 35782
Joined: Mon Feb 19, 2007 7:49 pm
Location: Daytona Beach Shores, Florida
Contact:

Re: I-bonds at 0.9% vs. TIPS at ~ 1.4% (taxable)?

Post by Mel Lindauer »

One needs to remember that I Bonds can never lose money, but TIPS can, if not held to maturity. That doesn't seem to be mentioned that often and certainly needs to be considered when making the buying decision. If you know you can hold to maturity, TIPS with a higher real rate might well be the better choice. On the other hand, if you're not sure when you'll need the money, I Bonds may well be the better choice.

And, remember, too, that where one places the TIPS (taxable or tax-deferred) can make a difference (annual taxation on phantom income in taxable acct.). On the other hand, since I Bonds offer tax deferral for up to 30 years, they can be used to do tax shifting from a high tax bracket to a lower one without taking up precious tax-deferred space.

Both TIPS and I Bonds can be effective in protecting the future spending power of one's money. Investors just need to understand how one or the other might be the better choice at any given time.
Best Regards - Mel | | Semper Fi
Topic Author
protagonist
Posts: 9277
Joined: Sun Dec 26, 2010 11:47 am

Re: I-bonds at 0.9% vs. TIPS at ~ 1.4% (taxable)?

Post by protagonist »

Mel Lindauer wrote: Thu Jun 01, 2023 5:35 pm One needs to remember that I Bonds can never lose money, but TIPS can, if not held to maturity. That doesn't seem to be mentioned that often and certainly needs to be considered when making the buying decision. If you know you can hold to maturity, TIPS with a higher real rate might well be the better choice. On the other hand, if you're not sure when you'll need the money, I Bonds may well be the better choice.

And, remember, too, that where one places the TIPS (taxable or tax-deferred) can make a difference (annual taxation on phantom income in taxable acct.). On the other hand, since I Bonds offer tax deferral for up to 30 years, they can be used to do tax shifting from a high tax bracket to a lower one without taking up precious tax-deferred space.

Both TIPS and I Bonds can be effective in protecting the future spending power of one's money. Investors just need to understand how one or the other might be the better choice at any given time.
You make a very good point, Mel!

That said, TIPS will not lose money in real terms, if held to maturity. Even if you get less than your initial investment (unlikely) you will still get whatever the yield to maturity is above inflation/deflation, so no matter what happens inflation/deflation-wise, if you hold to maturity, you essentially come out more or less the same in real terms (the only terms that matter).
True, with I-bonds, if there is significant deflation you can theoretically do much better in real terms.

And yes, you bring up some good points about the flexibility and unique tax benefits of I-bonds, which is why I still plan to buy my $20K allocation this year. I would probably buy more at 0.9% if I could, especially in my taxable account, but it is limited.

And continuing to hold I-bonds that are getting zero % real, when TIPS are being offered at 1.4-2% plus real, does not seem to still make sense - not be worth the added benefits of I-bonds, do you agree? That's a pretty big gap. 0.9% vs 1.4% is another story. I think you could make an argument either way for that.

I would NEVER buy TIPS that I am not quite sure I can hold to maturity. That would defeat the purpose of inflation protection.
User avatar
stevewolfe
Posts: 1676
Joined: Fri Oct 10, 2008 7:07 pm

Re: I-bonds at 0.9% vs. TIPS at ~ 1.4% (taxable)?

Post by stevewolfe »

protagonist wrote: Thu Jun 01, 2023 5:53 pm
And yes, you bring up some good points about the flexibility and unique tax benefits of I-bonds, which is why I still plan to buy my $20K allocation this year. I would probably buy more at 0.9% if I could, especially in my taxable account, but it is limited.
Have you considered using the gift box to purchase additional 0.9% I-bonds?
oxothuk
Posts: 891
Joined: Thu Nov 10, 2011 7:35 pm

Re: I-bonds at 0.9% vs. TIPS at ~ 1.4% (taxable)?

Post by oxothuk »

stevewolfe wrote: Thu Jun 01, 2023 7:05 pm
protagonist wrote: Thu Jun 01, 2023 5:53 pm
And yes, you bring up some good points about the flexibility and unique tax benefits of I-bonds, which is why I still plan to buy my $20K allocation this year. I would probably buy more at 0.9% if I could, especially in my taxable account, but it is limited.
Have you considered using the gift box to purchase additional 0.9% I-bonds?
Seems prudent to wait until October, when we have an inkling whether the fixed rate will rise or fall. #tipswatcher can usually make an educated guess.
User avatar
Mel Lindauer
Moderator
Posts: 35782
Joined: Mon Feb 19, 2007 7:49 pm
Location: Daytona Beach Shores, Florida
Contact:

Re: I-bonds at 0.9% vs. TIPS at ~ 1.4% (taxable)?

Post by Mel Lindauer »

protagonist wrote: Thu Jun 01, 2023 5:53 pm
Mel Lindauer wrote: Thu Jun 01, 2023 5:35 pm One needs to remember that I Bonds can never lose money, but TIPS can, if not held to maturity. That doesn't seem to be mentioned that often and certainly needs to be considered when making the buying decision. If you know you can hold to maturity, TIPS with a higher real rate might well be the better choice. On the other hand, if you're not sure when you'll need the money, I Bonds may well be the better choice.

And, remember, too, that where one places the TIPS (taxable or tax-deferred) can make a difference (annual taxation on phantom income in taxable acct.). On the other hand, since I Bonds offer tax deferral for up to 30 years, they can be used to do tax shifting from a high tax bracket to a lower one without taking up precious tax-deferred space.

Both TIPS and I Bonds can be effective in protecting the future spending power of one's money. Investors just need to understand how one or the other might be the better choice at any given time.
You make a very good point, Mel!

That said, TIPS will not lose money in real terms, if held to maturity. Even if you get less than your initial investment (unlikely) you will still get whatever the yield to maturity is above inflation/deflation, so no matter what happens inflation/deflation-wise, if you hold to maturity, you essentially come out more or less the same in real terms (the only terms that matter).
True, with I-bonds, if there is significant deflation you can theoretically do much better in real terms.

And yes, you bring up some good points about the flexibility and unique tax benefits of I-bonds, which is why I still plan to buy my $20K allocation this year. I would probably buy more at 0.9% if I could, especially in my taxable account, but it is limited.

And continuing to hold I-bonds that are getting zero % real, when TIPS are being offered at 1.4-2% plus real, does not seem to still make sense - not be worth the added benefits of I-bonds, do you agree? That's a pretty big gap. 0.9% vs 1.4% is another story. I think you could make an argument either way for that.

I would NEVER buy TIPS that I am not quite sure I can hold to maturity. That would defeat the purpose of inflation protection.
Never say NEVER, but if you can reasonably expect to hold to maturity and avoid the phantom tax problem (or live with it), TIPS could certainly be a good choice at the present time.
Best Regards - Mel | | Semper Fi
Topic Author
protagonist
Posts: 9277
Joined: Sun Dec 26, 2010 11:47 am

Re: I-bonds at 0.9% vs. TIPS at ~ 1.4% (taxable)?

Post by protagonist »

Mel Lindauer wrote: Thu Jun 01, 2023 8:54 pm
protagonist wrote: Thu Jun 01, 2023 5:53 pm
Mel Lindauer wrote: Thu Jun 01, 2023 5:35 pm One needs to remember that I Bonds can never lose money, but TIPS can, if not held to maturity. That doesn't seem to be mentioned that often and certainly needs to be considered when making the buying decision. If you know you can hold to maturity, TIPS with a higher real rate might well be the better choice. On the other hand, if you're not sure when you'll need the money, I Bonds may well be the better choice.

And, remember, too, that where one places the TIPS (taxable or tax-deferred) can make a difference (annual taxation on phantom income in taxable acct.). On the other hand, since I Bonds offer tax deferral for up to 30 years, they can be used to do tax shifting from a high tax bracket to a lower one without taking up precious tax-deferred space.

Both TIPS and I Bonds can be effective in protecting the future spending power of one's money. Investors just need to understand how one or the other might be the better choice at any given time.
You make a very good point, Mel!

That said, TIPS will not lose money in real terms, if held to maturity. Even if you get less than your initial investment (unlikely) you will still get whatever the yield to maturity is above inflation/deflation, so no matter what happens inflation/deflation-wise, if you hold to maturity, you essentially come out more or less the same in real terms (the only terms that matter).
True, with I-bonds, if there is significant deflation you can theoretically do much better in real terms.

And yes, you bring up some good points about the flexibility and unique tax benefits of I-bonds, which is why I still plan to buy my $20K allocation this year. I would probably buy more at 0.9% if I could, especially in my taxable account, but it is limited.

And continuing to hold I-bonds that are getting zero % real, when TIPS are being offered at 1.4-2% plus real, does not seem to still make sense - not be worth the added benefits of I-bonds, do you agree? That's a pretty big gap. 0.9% vs 1.4% is another story. I think you could make an argument either way for that.

I would NEVER buy TIPS that I am not quite sure I can hold to maturity. That would defeat the purpose of inflation protection.
Never say NEVER, but if you can reasonably expect to hold to maturity and avoid the phantom tax problem (or live with it), TIPS could certainly be a good choice at the present time.
I agree! Thanks, Mel!
Topic Author
protagonist
Posts: 9277
Joined: Sun Dec 26, 2010 11:47 am

Re: I-bonds at 0.9% vs. TIPS at ~ 1.4% (taxable)?

Post by protagonist »

oxothuk wrote: Thu Jun 01, 2023 8:35 pm
stevewolfe wrote: Thu Jun 01, 2023 7:05 pm
protagonist wrote: Thu Jun 01, 2023 5:53 pm
And yes, you bring up some good points about the flexibility and unique tax benefits of I-bonds, which is why I still plan to buy my $20K allocation this year. I would probably buy more at 0.9% if I could, especially in my taxable account, but it is limited.
Have you considered using the gift box to purchase additional 0.9% I-bonds?
Seems prudent to wait until October, when we have an inkling whether the fixed rate will rise or fall. #tipswatcher can usually make an educated guess.

I see your point that I could wait, and then compare the new rate with the existing rate in October and choose when to invest. The thing is I have a finite amount of cash to invest, and I expect TIPS yields and I-bond yields to fall as inflation gets under control (and with the resolution of the debt ceiling crisis), so my inclination is to strike while the iron is hot.

Gift box is a good idea, but for the first time since I started buying I-bonds in 2011 I am ambivalent about purchasing them since TIPS have become such a competitive product. So I will probably limit my purchase to $20K.
coachd50
Posts: 1778
Joined: Sun Oct 22, 2017 10:12 am

Re: I-bonds at 0.9% vs. TIPS at ~ 1.4% (taxable)?

Post by coachd50 »

Mel Lindauer wrote: Thu Jun 01, 2023 5:35 pm One needs to remember that I Bonds can never lose money, but TIPS can, if not held to maturity. That doesn't seem to be mentioned that often and certainly needs to be considered when making the buying decision. If you know you can hold to maturity, TIPS with a higher real rate might well be the better choice. On the other hand, if you're not sure when you'll need the money, I Bonds may well be the better choice.

And, remember, too, that where one places the TIPS (taxable or tax-deferred) can make a difference (annual taxation on phantom income in taxable acct.). On the other hand, since I Bonds offer tax deferral for up to 30 years, they can be used to do tax shifting from a high tax bracket to a lower one without taking up precious tax-deferred space.

Both TIPS and I Bonds can be effective in protecting the future spending power of one's money. Investors just need to understand how one or the other might be the better choice at any given time.
This is an excellent post. I think many investors get caught up in the number differential and don't recognize that there are other aspects of financial decisions that need to be considered.
Thank you for bringing this up.
Post Reply