Any reason not to buy iBonds?

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caro in nyc
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Any reason not to buy iBonds?

Post by caro in nyc »

My husband and I are looking to invest a little, seems like it would be a good time for us each to buy the max 10k in our names.

Is there any reason this would be unsound? Quite new to this all.
panhead
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Re: Any reason not to buy iBonds?

Post by panhead »

caro in nyc wrote: Tue Jul 05, 2022 7:01 am My husband and I are looking to invest a little, seems like it would be a good time for us each to buy the max 10k in our names.

Is there any reason this would be unsound? Quite new to this all.
The only issue is that the $10k for each of you will not be available for a year. As long as that's not an issue, I can't think of any reason not to buy them.
exodusNH
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Re: Any reason not to buy iBonds?

Post by exodusNH »

caro in nyc wrote: Tue Jul 05, 2022 7:01 am My husband and I are looking to invest a little, seems like it would be a good time for us each to buy the max 10k in our names.

Is there any reason this would be unsound? Quite new to this all.
Your money is locked up for 12 months, with a 3-month interest penalty for 5 years.

The rate you're hearing about resets every 6 months. Over the long term, they keep with inflation but nothing more as they have a fixed interest rate of 0%.

With that said, if you have a need to hold bonds, they are an excellent option.
Statistical
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Re: Any reason not to buy iBonds?

Post by Statistical »

ibonds are zero risk so if you have no investments they are probably a good way to get started beyond saving account without fear.

Some (minor) negatives:
1) They are taxable at federal level. The good news is taxes are deferred until you redeem them but you will pay taxes. No way to hold an ibond in an IRA.
2) You can't redeem for a year and if redeemed in less than five years you lose three months of interest payments.
3) The real return is 0%. They keep your money treading water not losing to inflation but your wealth won't grow in real terms.
4) Short of "hacks" you are limited to $10k per person. You and your husband can each buy $10k but you would need your own TD accounts.
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Re: Any reason not to buy iBonds?

Post by evelynmanley »

caro in nyc wrote: Tue Jul 05, 2022 7:01 am My husband and I are looking to invest a little, seems like it would be a good time for us each to buy the max 10k in our names.

Is there any reason this would be unsound? Quite new to this all.
You can purchase more than 10K max in your names:

https://thefinancebuff.com/how-to-buy-i-bonds.html
Harry Sit's archives about I-Bonds: https://thefinancebuff.com/tag/i-bonds

<<I Bonds are such a great deal that the government puts a limit on how much you can buy each year. At current rates, you should get your full quota before you buy any other CDs or bond funds.

When you buy on the government website TreasuryDirect.gov, the limit is $10,000 each calendar year per Social Security Number as the primary owner in a personal account. When you buy using money from your tax refund, the limit is $5,000 per tax return (not per person when you file jointly).

If you have a trust, you’re allowed to buy another $10,000 each calendar year in a trust account. See Buy More I Bonds in a Revocable Living Trust.

If you have a business, the business can also buy $10,000 each calendar year. See Buy I Bonds for Your Business: Sole Proprietorship, LLC, S-Corp.

If you have kids under 18, you can also buy $10,000 each calendar year in each of your kids’ names. See Buy I Bonds in Your Kid’s Name.

If you’d like to buy I Bonds as gifts to others, see Buy I Bonds as a Gift.

A married couple each with a trust and a self-employment business can buy up to $65,000 each calendar year, and more if they file separate tax returns, buy in their kids’ names, or buy as gifts for family members.

$10,000 in Person A’s personal account with Person B as the second owner
$10,000 in Person B’s personal account with Person A as the second owner
$10,000 in an account for Person A’s trust
$10,000 in an account for Person B’s trust
$10,000 in an account for Person A’s business
$10,000 in an account for Person B’s business
$5,000 using money from their tax refund if they file jointly (or $5,000 each if they file separately after making sure they won’t lose other tax benefits)
$10,000 in the name of each of their kids under 18
$10,000 as a gift for each member of the extended family

We had only one trust before. We created a second trust with software to buy another $10,000. For buying I Bonds in a trust account in general, please read Buy More I Bonds in a Revocable Living Trust.<<
Topic Author
caro in nyc
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Re: Any reason not to buy iBonds?

Post by caro in nyc »

Statistical wrote: Tue Jul 05, 2022 7:08 am ibonds are zero risk so if you have no investments they are probably a good way to get started beyond saving account without fear.

Some (minor) negatives:
1) They are taxable at federal level. The good news is taxes are deferred until you redeem them but you will pay taxes. No way to hold an ibond in an IRA.
2) You can't redeem for a year and if redeemed in less than five years you lose three months of interest payments.
3) The real return is 0%. They keep your money treading water not losing to inflation but your wealth won't grow in real terms.
4) Short of "hacks" you are limited to $10k per person. You and your husband can each buy $10k but you would need your own TD accounts.
Thanks we don't need the cash - curious what you mean on point 3. Is there no material gain when we eventually cash out?
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climber2020
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Re: Any reason not to buy iBonds?

Post by climber2020 »

caro in nyc wrote: Tue Jul 05, 2022 7:01 am Is there any reason this would be unsound?
When you actually need the bonds late in your investing career, you're limited to acquiring a small amount per year.

When you are early in your investing career and have the ability to stockpile them in meaningful amounts, that money is arguably better off in stocks unless you're extremely risk averse.

This doesn't make them unsound but does limit their utility for someone with an average to high risk tolerance.
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Re: Any reason not to buy iBonds?

Post by Outer Marker »

There is no better safe investment at the moment.
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Re: Any reason not to buy iBonds?

Post by tangy »

Just be prepared to deal with the Treasury Direct site and their current customer service situation which is somewhat problematic. Read the post called "Can you delete out your Treasury Direct Account". Just go in with eyes wide open and be very very careful with how you input all of your information and put in ALL information (such as bank account) that won't require a change in the near future. They are quite overwhelmed.
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Statistical
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Re: Any reason not to buy iBonds?

Post by Statistical »

caro in nyc wrote: Tue Jul 05, 2022 7:13 am
Statistical wrote: Tue Jul 05, 2022 7:08 am ibonds are zero risk so if you have no investments they are probably a good way to get started beyond saving account without fear.

Some (minor) negatives:
1) They are taxable at federal level. The good news is taxes are deferred until you redeem them but you will pay taxes. No way to hold an ibond in an IRA.
2) You can't redeem for a year and if redeemed in less than five years you lose three months of interest payments.
3) The real return is 0%. They keep your money treading water not losing to inflation but your wealth won't grow in real terms.
4) Short of "hacks" you are limited to $10k per person. You and your husband can each buy $10k but you would need your own TD accounts.
Thanks we don't need the cash - curious what you mean on point 3. Is there no material gain when we eventually cash out?
In nominal terms there is a gain but ibonds track inflation. If inflation is 5% the costs of goods have gone up 5%. So if you invest $1K and it pays 5% because inflation is 5% a year later you have $1,050 (simplified ignoring the twice a year reset, compounding, and interest planalty). So yes you have $1,050 not $1,000 but the cost of a basket of good which use to cost $1,000 now costs $1,050. You can't get "ahead" you can only keep up with inflation. If inflation is high (like right now) it pays more but the cost of stuff is rising faster as well. When inflation is low it pays a lower rate but the cost of stuff is rising slower.

The REAL return (inflation adjusted) is 0%. In comparison a savings account on average has a negative real return (lose buying power over time). The stock market has a 7.5% long term real return. The total bond market is slightly positive in real terms.
Last edited by Statistical on Tue Jul 05, 2022 7:26 am, edited 2 times in total.
exodusNH
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Re: Any reason not to buy iBonds?

Post by exodusNH »

caro in nyc wrote: Tue Jul 05, 2022 7:13 am
Statistical wrote: Tue Jul 05, 2022 7:08 am ibonds are zero risk so if you have no investments they are probably a good way to get started beyond saving account without fear.

Some (minor) negatives:
1) They are taxable at federal level. The good news is taxes are deferred until you redeem them but you will pay taxes. No way to hold an ibond in an IRA.
2) You can't redeem for a year and if redeemed in less than five years you lose three months of interest payments.
3) The real return is 0%. They keep your money treading water not losing to inflation but your wealth won't grow in real terms.
4) Short of "hacks" you are limited to $10k per person. You and your husband can each buy $10k but you would need your own TD accounts.
Thanks we don't need the cash - curious what you mean on point 3. Is there no material gain when we eventually cash out?
No, just that they're going to return you the inflation rate, adjusted every 6 months. If your expenses happen to match the same expenses that go into calculating inflation, then when you get your money out, you will have had no increase in purchasing power. If your personal inflation rate is lower than the hypothetical person, you will have had an increase in purchasing power. For someone that owns their home and doesn't commute too much, your inflation rate is probably lower than the hypothetical.

Regardless, the value of what you get back will be bigger (assuming we continue to have inflation at some level), but you will pay federal income tax on the interest. (This is true for interest earned in savings accounts, too. It's not unique to I Bonds.)

Even with that caveat, because of the current interest rate environment, they are a great deal.

People like to overcomplicate bond returns by switching between nominal and real returns. But no one talks about that with savings accounts and often times not about stocks either.
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Re: Any reason not to buy iBonds?

Post by Rob5TCP »

On a risk adjusted basis, they are probably the best current safe investment. How long that will remain true is unknown. I have been buying I bonds on/off for literally decades.
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Re: Any reason not to buy iBonds?

Post by nisiprius »

I have been buying them since the year 2000.

I know of no reason not to buy them, other than a) the one-year wait before you can redeem them, b) the possibility that it might be more suitable for some investors to take more risk in hope of getting higher return, and c) dislike of the clunky and irritating Treasury Direct website.

The "bonds" you read about in investing books and news are marketable bonds. When you buy an individual bond, you get the (smallish) interest payments. But if you want to get most of your money out of it, there are only two ways: hold it to maturity, usually many years, or sell it on the market. When you sell it on the market you are subject to interest rate risk; the value fluctuates. You can't get your money out at a time of your own choosing without taking market risk.

But series I savings bonds are not marketable bonds. You redeem them directly with the Treasury any time after the first year, and the amount of money you get is determined by a) the "fixed" interest rate, currently zero, b) the inflation adjustments, currently big, and c) the three-month interest penalty if you redeem in less than five years. Notice what is NOT in that equation: there is no interest rate risk! That makes them completely different from marketable bonds. If interest rates rise, the redemption value of your bond does not fall.

A chart of savings bond values over time looks like a chart of Treasury bills or money market mutual funds: it's smooth and it never goes down.

Series I savings bonds are pretty good investments. They have always compared favorably with bank accounts. My belief is that you don't hear much about them--or didn't, anyway--because there is no way Wall Street can make any money from them. The Bogleheads' Guide to Investment is one of the very few "investment" books that talks about them.

An important detail here is that it is not too late to buy them. If inflation cools down, you lose nothing--you just wait a year and sigh and redeem them and invest in something else. If inflation stays high, the money you put into them holds real value. This is different from (say) TIPS or a TIPS fund, where you might worry whether you might be buying them at high point and they might possibly lose money over the next year or so.

Another way of saying this is that subject to the one-year-wait there is almost no opportunity cost in buying I bonds, because you can redeem them, any time from 1 to 30 years, with no dollar loss. If you buy them and later decide something else is better, you redeem the I bond and buy it.
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Re: Any reason not to buy iBonds?

Post by Statistical »

nisiprius wrote: Tue Jul 05, 2022 7:43 am Series I savings bonds are pretty good investments. They have always compared favorably with bank accounts. My belief is that you don't hear much about them--or didn't, anyway--because there is no way Wall Street can make any money from them. The Bogleheads' Guide to Investment is one of the very few "investment" books that talks about them.
They are very useful for emergency funds. Most people even those with agressive 100% equity portfolios have an EF sitting in cash maybe earning 1% on average. Now getting an EF into ibonds can be challenging due to the $10k limit, 1 year hold, and <5 year maturity but you can roll into them slowly and then have an EF which is earning at least a 0% real return. After 5 years the first bond will be penalty free. After 10 years all of your ibond EF will be penalty free and earning (historically) around 3% nominal vs <1% nominal.
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Re: Any reason not to buy iBonds?

Post by dbr »

The reasons a person might not buy I bonds is that the money should be used for something else.

If the question is one of keeping money in a savings accounts or CDs or T bills then I bonds are an excellent alternative. If the alternatives are making sure to get maximum company match on a 401k or to keep investing in your appropriate allocation to equities then one might think a bit more. Also note tax deferment for I bonds is of the earnings and not of the original principal. One should think before eschewing tax deferment of pretax earnings in a 401k or IRA. If a person is still maxing 401k and IRA accounts Ibonds are left as being very attractive. Note as a competition stocks in taxable accounts still have deferred taxation on capital gains and may even avoid tax by basis step up. Be sure you are clear what alternatives you have.

For a long term investor TIPS at a hoped for better than 0% real yield could be a better choice but it is also a different choice in the same sense bond funds are a different choice than holding CDs. TIPS are also tax deferred in 401k's and IRA's.

A dilemma with I bonds is the purchase limit which means that you have to do something specific now to eventually have a significant allocation there.

When inflation is high and at an anomaly relative to interest rates on nominal fixed income I bonds are a windfall. In the longer term 0% real yield is not a windfall.

Probably for most people $10k-$20k a year into I bonds does not much affect other choices and would be an excellent idea.
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Re: Any reason not to buy iBonds?

Post by HMSVictory »

Take a peek at the "locked out of treasury direct hell" here on the forum.

I'll pass on $900 a year of interest to not have to deal with that. Life is too short to have the people who run the DMV taking care of my hard earned money (and I say this with much love as a fellow .GOV employee). :shock:

People complain about Vanguards tech (including me) - take a peek at treasury direct. The 90s called and they want their website back!
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Re: Any reason not to buy iBonds?

Post by dbr »

HMSVictory wrote: Tue Jul 05, 2022 9:12 am Take a peek at the "locked out of treasury direct hell" here on the forum.

I'll pass on $900 a year of interest to not have to deal with that. Life is too short to have the people who run the DMV taking care of my hard earned money (and I say this with much love as a fellow .GOV employee). :shock:
There is that. We had a TD account but stopped holding anything in it about the time they mailed out the "magic decoder ring" cards. There was just no way we were going to mess with an operation like that.
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Re: Any reason not to buy iBonds?

Post by Statistical »

HMSVictory wrote: Tue Jul 05, 2022 9:12 am Take a peek at the "locked out of treasury direct hell" here on the forum.

I'll pass on $900 a year of interest to not have to deal with that. Life is too short to have the people who run the DMV taking care of my hard earned money (and I say this with much love as a fellow .GOV employee). :shock:

People complain about Vanguards tech (including me) - take a peek at treasury direct. The 90s called and they want their website back!
Yeah it would be nice if you could just buy ibonds through custodians (i.e. Fidelity) the same way you can treasuries. I am sure the US Treasury would rather just deal with major brokerages acting as a pass through than manage millions of individual investor accounts.

That would remove two of the cons for ibonds. One you can't buy them in a tax sheltered account and two you have to deal with TD.
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Re: Any reason not to buy iBonds?

Post by HMSVictory »

Statistical wrote: Tue Jul 05, 2022 9:22 am
HMSVictory wrote: Tue Jul 05, 2022 9:12 am Take a peek at the "locked out of treasury direct hell" here on the forum.

I'll pass on $900 a year of interest to not have to deal with that. Life is too short to have the people who run the DMV taking care of my hard earned money (and I say this with much love as a fellow .GOV employee). :shock:

People complain about Vanguards tech (including me) - take a peek at treasury direct. The 90s called and they want their website back!
Yeah it would be nice if you could just buy ibonds through custodians (i.e. Fidelity) the same way you can treasuries. I am sure the US Treasury would rather just deal with major brokerages acting as a pass through than manage millions of individual investor accounts.

That would remove two of the cons for ibonds. One you can't buy them in a tax sheltered account and two you have to deal with TD.
Absolutely. If I could pick them up through Vanguards trading platform its a no brainer but as I have learned the hard way many times before there is no free lunch in life. Sigh.
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Re: Any reason not to buy iBonds?

Post by samsoes »

No reason whatsoever, unless you need the cash before the one year lock up period expires. Don't overthink it!
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Re: Any reason not to buy iBonds?

Post by harvestbook »

Statistical wrote: Tue Jul 05, 2022 7:08 am
3) The real return is 0%. They keep your money treading water not losing to inflation but your wealth won't grow in real terms.
Some people's personal inflation rate is much lower than the published rate. In our circumstances with no debt, little gas and grocery consumption, home paid off, and low cost of living, I figure we'll gain a little in real terms. But I agree they are not a wealth builder over the long term. We consider them a medium-term emergency fund, but they sure are nice to have in times like these (and probably not so great in a lot of other times).
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Re: Any reason not to buy iBonds?

Post by rakish_weasel »

Seconding Statistical's and harvestbook's replies.

They are terrific as an EF -- much safer bet than the "high-yield" online savings accounts. As an example, after all that's gone on in 2022 re: inflation, my Barclay's EF interest rate has "gone up" to 1.10% -- whereas iBonds are at 9.62% for the next six months and were in the 5-6% range prior to that.

As noted previously in this thread, iBonds aren't really a key source of wealth/growth -- you're limited to $10k/year in purchases for the most part, and anyone looking to invest with an investment horizon of 10+ years is probably better off investing in equities. So building a massive stash of iBonds is not necessarily advisable for that reason.

EF's are really where iBonds can shine -- and even then, it takes time to build them up. With house paid off since 2018, I've kept roughly $50k in Barclay's online savings EF, which is a hair shy of 2 years' expenses. I've gradually been migrating that EF to iBonds. Bought $10k of iBonds in the first year, but because you can't withdraw from iBonds for 12 months, I kept the full $50k in Barclays also. Once that first batch of iBonds hit the the 1-year mark, I... a) moved $10k out of Barclays and into VTI in Fidelity taxable, and then b) bought another $10k of iBonds.

So, while the conversion is going on, I'm tying up an extra $10k due to the most recent batch of iBonds to which I have no access. Eventually, once $50k are in iBonds with the most recent batch > 1 year old, the migration will be complete. It's true you'll lose 3 mos' interest if you withdraw < 5 years, but that's more than offset by the much higher interest rate vs. HYSA's. I'll probably still keep $10k in Barclays just for the slightly easier accessibility.

To some, the bit of extra interest from iBonds isn't worth the hassle of this conversion process, or the hassle of the stuck-in-the-1990's .gov website. I found the .gov website's online 'keyboard' to enter password mildly bemusing, but hardly a showstopper -- otherwise, I've had zero issues dealing with it, and am disinclined to turn down "free money" in the form of higher interest rates. Every bit counts, though as always ymmv.

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Re: Any reason not to buy iBonds?

Post by Bob Loblaw »

How is the interest penalty calculated, with respects to the different interest rates every 6 months?

Let's say I cash out after 38 months. Do they take the total interest earned for that 38 months, then divide it by 38, and then multiply by 35? Or, is it just 3 months of interest for the interest rate at time of redemption?
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Re: Any reason not to buy iBonds?

Post by evelynmanley »

Bob Loblaw wrote: Tue Jul 05, 2022 11:14 am How is the interest penalty calculated, with respects to the different interest rates every 6 months?

Let's say I cash out after 38 months. Do they take the total interest earned for that 38 months, then divide it by 38, and then multiply by 35? Or, is it just 3 months of interest for the interest rate at time of redemption?
https://thefinancebuff.com/how-to-buy-i-bonds.html

<<
Three-Month Lag in Current Value

If your bonds are still within five years from the Issue Date, the Current Value automatically excludes interest earned in the last three months. If you cash out today, you’ll receive the Current Value. That’s why you won’t see any interest in the current value during the first four months. You will start seeing a higher value in the fifth month.<<
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Re: Any reason not to buy iBonds?

Post by Bob Loblaw »

Also, my FIL wants to buy iBonds for our kids. Neither me nor my wife have a TD account yet. Does having a TD account require me buying any treasuries, or is it simply having a username tied to my SSN, and it's ok to have no actual funds on the TD books in my (or my wife's) name?
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Re: Any reason not to buy iBonds?

Post by exodusNH »

Bob Loblaw wrote: Tue Jul 05, 2022 11:26 am Also, my FIL wants to buy iBonds for our kids. Neither me nor my wife have a TD account yet. Does having a TD account require me buying any treasuries, or is it simply having a username tied to my SSN, and it's ok to have no actual funds on the TD books in my (or my wife's) name?
You don't need to own anything to have an account.

Note that you can share one email address with multiple accounts because you log in with an account number, e.g. A-123-456-789. You'll get one account number per person.

If you do associate a bank account with a login, make sure it's with a bank you intend to use long term as updating the bank account after the fact is painful.
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Re: Any reason not to buy iBonds?

Post by dbr »

Bob Loblaw wrote: Tue Jul 05, 2022 11:26 am Also, my FIL wants to buy iBonds for our kids. Neither me nor my wife have a TD account yet. Does having a TD account require me buying any treasuries, or is it simply having a username tied to my SSN, and it's ok to have no actual funds on the TD books in my (or my wife's) name?
If your FIL wants to gift I bonds to your kids he has to have an account and each child has to have an account. I think a minor account needs to be a custodial account with an adult custodian, probably you. You will also have to be careful about what bank accounts you link to.

One might want to think a little about buying I bonds for kids. Here is an article on it:

https://thefinancebuff.com/buy-i-bonds-kids-name.html

Of course the FIL can give you the money and you buy the bonds in your minor linked account. That would reduce the finagling at TD.
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Re: Any reason not to buy iBonds?

Post by PicassoSparks »

I like I Bonds as a high optionality emergency fund in the short term and as an income floor raiser in the long term. Either I’ll need to use them or in 30ish years, I’ll have an annual infusion of 10kish of today’s dollars.

It is a little weird that the I Bond contribution limits don’t track inflation and I hope they start offering them with real returns above 0.
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Re: Any reason not to buy iBonds?

Post by Statistical »

Bob Loblaw wrote: Tue Jul 05, 2022 11:14 am How is the interest penalty calculated, with respects to the different interest rates every 6 months?

Let's say I cash out after 38 months. Do they take the total interest earned for that 38 months, then divide it by 38, and then multiply by 35? Or, is it just 3 months of interest for the interest rate at time of redemption?
The most recent three months are just forfeited. Note it is the most recent three so if interest rates fall and the yield on ibond goes from 9% to 5% and you cash 3 months after the rate change you lose 3 months at 5% not 3 months at 9% or some computed average.

As others point out the website shows the current value with penalty (if applicable) so you simply won't see any interest for the first 3 months. On month 4 you will see 1 months of interest on month 12 you will see 9. On month 59 you will see 56 and on month 60 the 3 months of penalty interest will appear all at once showing the full 60.
Last edited by Statistical on Tue Jul 05, 2022 4:39 pm, edited 2 times in total.
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Re: Any reason not to buy iBonds?

Post by Tamalak »

Ibonds are a perfectly sound investment and always have been. I don't personally buy them because:

1. Their long term performance is comparable to BND
2. Managing them is apparently a pain in the butt.
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Re: Any reason not to buy iBonds?

Post by Statistical »

Bob Loblaw wrote: Tue Jul 05, 2022 11:26 am Also, my FIL wants to buy iBonds for our kids. Neither me nor my wife have a TD account yet. Does having a TD account require me buying any treasuries, or is it simply having a username tied to my SSN, and it's ok to have no actual funds on the TD books in my (or my wife's) name?
He can gift them to your kids but they will remain in his account until an account is made for the kids.

Requiring a TD account does not require funds. If the bond is being gifted to your kids to redeem them you will need to create an account for the child receiving it. You can create a custodial account.
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Re: Any reason not to buy iBonds?

Post by mr_brightside »

dbr wrote: Tue Jul 05, 2022 9:16 am
HMSVictory wrote: Tue Jul 05, 2022 9:12 am Take a peek at the "locked out of treasury direct hell" here on the forum.

I'll pass on $900 a year of interest to not have to deal with that. Life is too short to have the people who run the DMV taking care of my hard earned money (and I say this with much love as a fellow .GOV employee). :shock:
There is that. We had a TD account but stopped holding anything in it about the time they mailed out the "magic decoder ring" cards. There was just no way we were going to mess with an operation like that.
second (third ??) the above

their CS leaves a lot to be desired. it's almost like they WANT people to lose access to their $$$ over the years...

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JoeRetire
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Re: Any reason not to buy iBonds?

Post by JoeRetire »

caro in nyc wrote: Tue Jul 05, 2022 7:01 am Is there any reason this would be unsound?
Can you afford the $20k? Can you keep it locked up for a while?
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caro in nyc
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Re: Any reason not to buy iBonds?

Post by caro in nyc »

JoeRetire wrote: Tue Jul 05, 2022 3:36 pm
caro in nyc wrote: Tue Jul 05, 2022 7:01 am Is there any reason this would be unsound?
Can you afford the $20k? Can you keep it locked up for a while?
Yes and yes.
But since I am looking to build wealth more than secure emergency funds this thread is making me rethink them as a strategy.

Perhaps I am better off putting into a Vanguard account and letting grow.
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Re: Any reason not to buy iBonds?

Post by increment »

Statistical wrote: Tue Jul 05, 2022 7:22 am In nominal terms there is a gain but ibonds track inflation. If inflation is 5% the costs of goods have gone up 5%. So if you invest $1K and it pays 5% because inflation is 5% a year later you have $1,050 (simplified ignoring the twice a year reset, compounding, and interest planalty). So yes you have $1,050 not $1,000 but the cost of a basket of good which use to cost $1,000 now costs $1,050. You can't get "ahead" you can only keep up with inflation.
At some point, the $50 that your bond made has to be reported on your federal tax return as taxable income. So (unless your tax rate is 0%) your net spending power can't keep with inflation.
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Re: Any reason not to buy iBonds?

Post by Statistical »

increment wrote: Tue Jul 05, 2022 3:47 pm
Statistical wrote: Tue Jul 05, 2022 7:22 am In nominal terms there is a gain but ibonds track inflation. If inflation is 5% the costs of goods have gone up 5%. So if you invest $1K and it pays 5% because inflation is 5% a year later you have $1,050 (simplified ignoring the twice a year reset, compounding, and interest planalty). So yes you have $1,050 not $1,000 but the cost of a basket of good which use to cost $1,000 now costs $1,050. You can't get "ahead" you can only keep up with inflation.
At some point, the $50 that your bond made has to be reported on your federal tax return as taxable income. So (unless your tax rate is 0%) your net spending power can't keep with inflation.
Very true. The return will be slightly negative in real terms unless it has a non-zero fixed rate.

On a similar note I think capital gains should be indexed to inflation. If I buy one share of GLD for $100 and a year later sell it for $105 but we had 5% inflation did I really have a gain?
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Re: Any reason not to buy iBonds?

Post by dbr »

caro in nyc wrote: Tue Jul 05, 2022 3:46 pm
JoeRetire wrote: Tue Jul 05, 2022 3:36 pm
caro in nyc wrote: Tue Jul 05, 2022 7:01 am Is there any reason this would be unsound?
Can you afford the $20k? Can you keep it locked up for a while?
Yes and yes.
But since I am looking to build wealth more than secure emergency funds this thread is making me rethink them as a strategy.

Perhaps I am better off putting into a Vanguard account and letting grow.
If your objective is to build wealth and you have a long time to do it, which seems to be the case, there might not be a special advantage for I bonds for you excepting some possible use in your E fund. To the extent you incorporate bonds in your asset allocation a TIPS fund or lots of other choices in bonds can make sense. If you want to consider the more exotic bond theories even a long TIPS fund like LTPZ might be a choice for some people. The current nominal SEC yield on LTPZ is 8.17% with a real yield a little less than zero I suppose. This is not a recommendation but just some perspective on the situation given what you are saying.

You probably need to back up and consider your asset allocation from a long term point of view thinking through your need (objectives), ability, and willingness to take risk.

In terms of an answer to your original question a reason not to buy I bonds can be that your money should be buying stocks, but you do have to look at the whole plan and see what fits where.
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Re: Any reason not to buy iBonds?

Post by TN_Boy »

caro in nyc wrote: Tue Jul 05, 2022 7:01 am My husband and I are looking to invest a little, seems like it would be a good time for us each to buy the max 10k in our names.

Is there any reason this would be unsound? Quite new to this all.
ibonds are well thought of on this board. But I got rid of all mine a few years ago. Basically:

1) I didn't own enough of them to make them "interesting."
2) Although 0% real looks pretty good right now, with the recent spike in inflation, I didn't find that rate *at all* attractive for many years.
3) I didn't have any nightmare experiences with the TD site, but it was a pain, and I decided the extra account was more trouble than it was worth. Some people are having nightmares with it.

You can now buy TIPs with similar real interest rates, and while ibonds are still better in some ways than TIPs, I didn't find them worth the trouble. You can do the math -- if I own say $50,000 worth of ibonds, how much more money do I have versus holding TIPs, or short term treasuries, etc. Add the pain of TD and it was not worth my time.

Others find them definitely worth the time. Had I been able to buy ibonds through my brokerage and handle them with a minimal amount of hassle, I would still own the ones I had, and would have bought additional ones over the last couple of years, as part of my fixed income allocation.

ibonds are a solid, extremely low risk option. They are probably the lowest risk option out there, given they will keep up with inflation before taxes, and have no credit risk. They are also tax-efficient.

They are, of course, a very conservative investment, with no growth potential over inflation at current ibond rates.

As others have noted, if you are looking to begin investing, you probably need to step back and think about your overall asset allocation -- how much in stocks, how much in bonds, etc. You can look at some of wiki entries, for example:

https://www.bogleheads.org/wiki/Boglehe ... art-up_kit

and/or post a more general question like "I'd like to start investing, here are some questions."
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Re: Any reason not to buy iBonds?

Post by Hoosier CPA »

Statistical wrote: Tue Jul 05, 2022 3:22 pm
Bob Loblaw wrote: Tue Jul 05, 2022 11:14 am How is the interest penalty calculated, with respects to the different interest rates every 6 months?

Let's say I cash out after 38 months. Do they take the total interest earned for that 38 months, then divide it by 38, and then multiply by 35? Or, is it just 3 months of interest for the interest rate at time of redemption?
The most recent three months are just forfeited. Note it is the most recent three so if interest rates fall and the yield on ibond goes from 9% to 5% and you cash 3 months after the rate change you lose 3 months at 5% not 3 months at 9% or some computed average.

As others point out the website shows the current value with penalty (if applicable) so you simply won't see any interest for the first 3 months. On month 4 you will see 3 months of interest on month 12 you will see 9. On month 59 you will see 56 and on month 60 the 3 months of penalty interest will appear.
Thanks for sharing this. I was wondering which 3 months they subtracted. Good it's the most recent since if I sold prior to 60 months, it would be because the rates came down.
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Re: Any reason not to buy iBonds?

Post by Mel Lindauer »

Statistical wrote: Tue Jul 05, 2022 9:22 am
HMSVictory wrote: Tue Jul 05, 2022 9:12 am Take a peek at the "locked out of treasury direct hell" here on the forum.

I'll pass on $900 a year of interest to not have to deal with that. Life is too short to have the people who run the DMV taking care of my hard earned money (and I say this with much love as a fellow .GOV employee). :shock:

People complain about Vanguards tech (including me) - take a peek at treasury direct. The 90s called and they want their website back!
Yeah it would be nice if you could just buy ibonds through custodians (i.e. Fidelity) the same way you can treasuries. I am sure the US Treasury would rather just deal with major brokerages acting as a pass through than manage millions of individual investor accounts.

That would remove two of the cons for ibonds. One you can't buy them in a tax sheltered account and two you have to deal with TD.
I Bonds are already tax-deferred for up to 30 years, so there's no reason to need to put them in a tax-sheltered account. They can actually expand your tax-deferred space.

I do agree with your second concern about having to deal with TD, though.
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Re: Any reason not to buy iBonds?

Post by 1moreyr »

My experience with TD has been pleasant (so far)
I own $100K in Ibonds growing at 8% (over 12 months 7.1/9.6%) while right now the rest of my stock fund drops 20% and my bond funds drop 10%. as I am retired, I like not selling stocks in a down market.

i have not cashed any out yet but the money moves from my checking account to TD in less than 24 hours. If it goes back that quickly when I need it, i will be happy.

Basically, if you are carrying cash in a savings/checking account for emergencies, this is a better place for it.. IMHO

like everything, it's a tool in a tool box,,,,, It's not an all or nothing.
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Re: Any reason not to buy iBonds?

Post by mikejuss »

I myself haven't bought them because I can't purchase them through a major brokerage house (Vanguard, Fidelity, etc.), and don't want to set up an account at Treasury Direct and then have to keep my eyes on it. I really value simplicity.
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Re: Any reason not to buy iBonds?

Post by Yesterdaysnews »

I'm just holding them (bought a few months ago) until inflations prints are back to normal. Decent place to park some cash while all of this plays out.
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Re: Any reason not to buy iBonds?

Post by Soul.in.Progress »

I have a decent amount of I bonds, and buy more each year, but if we’re listing potential reasons not to: I seem to recall a thread from several years ago where people were greatly concerned about the potential for not being made whole if fraud occurred in TD accounts.

If I find that thread I’ll link it here
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Re: Any reason not to buy iBonds?

Post by camper »

We have been buying ibonds periodically for the last 12 years or so based off learning from the posts on this wonderful forum. We use them as an emergency fund. We both have very stable jobs and thankfully never have had to sell any. They aren't anything to get overly excited about.
I sometimes wonder about the complaints about the TD website. We don't find it too hard or problematic to navigate. As you log off the site, there is a survey where 62% rate the website excellent, 28% good, 6% fair and 4% poor. IMHO those are pretty decent results.
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Re: Any reason not to buy iBonds?

Post by retired-early »

camper wrote: Tue Jul 05, 2022 9:59 pm We have been buying ibonds periodically for the last 12 years or so based off learning from the posts on this wonderful forum. We use them as an emergency fund. We both have very stable jobs and thankfully never have had to sell any. They aren't anything to get overly excited about.
I sometimes wonder about the complaints about the TD website. We don't find it too hard or problematic to navigate. As you log off the site, there is a survey where 62% rate the website excellent, 28% good, 6% fair and 4% poor. IMHO those are pretty decent results.
The website hasn’t changed in years. I’m able to navigate without much trouble. I hate the virtual keyboard for login but on my Mac the account number and password are stored which allows me to bypass it.
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Re: Any reason not to buy iBonds?

Post by PowderDay9 »

increment wrote: Tue Jul 05, 2022 3:47 pm
Statistical wrote: Tue Jul 05, 2022 7:22 am In nominal terms there is a gain but ibonds track inflation. If inflation is 5% the costs of goods have gone up 5%. So if you invest $1K and it pays 5% because inflation is 5% a year later you have $1,050 (simplified ignoring the twice a year reset, compounding, and interest planalty). So yes you have $1,050 not $1,000 but the cost of a basket of good which use to cost $1,000 now costs $1,050. You can't get "ahead" you can only keep up with inflation.
At some point, the $50 that your bond made has to be reported on your federal tax return as taxable income. So (unless your tax rate is 0%) your net spending power can't keep with inflation.
Exactly. It's hard for me to get excited about having to use the Treasury Direct website (and potentially calling the government if there's an issue) all to essentially guarantee a real loss.

For those with high a net worth, the relatively small annual purchase limits makes I bonds even less appealing.
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Re: Any reason not to buy iBonds?

Post by PicassoSparks »

Tamalak wrote: Tue Jul 05, 2022 3:24 pm 1. Their long term performance is comparable to BND
This is a surprise to me. I’d love to learn more. Where can one make this comparison?
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Re: Any reason not to buy iBonds?

Post by HIinvestor »

I just bought iBonds for me, H and our D. I had heard of them but never purchased them before. They seem fairly straight forward and I can understand them ok. I was OK with the TD website. It’s not fabulous but I’ve been on worse, sadly. I plan to buy more iBonds in 2022. I’m tired of the terribly low interest rates and don’t currently have an appetite to pump more into index funds at the moment.

I’m not planning to purchase more iBonds for our trusts—trying to keep life simpler rather than more complicated. Somehow I’m not all that excited by TIPs and treasuries—don’t understand them at the moment and will have to learn more.
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Re: Any reason not to buy iBonds?

Post by Grt2bOutdoors »

caro in nyc wrote: Tue Jul 05, 2022 7:13 am
Statistical wrote: Tue Jul 05, 2022 7:08 am ibonds are zero risk so if you have no investments they are probably a good way to get started beyond saving account without fear.

Some (minor) negatives:
1) They are taxable at federal level. The good news is taxes are deferred until you redeem them but you will pay taxes. No way to hold an ibond in an IRA.
2) You can't redeem for a year and if redeemed in less than five years you lose three months of interest payments.
3) The real return is 0%. They keep your money treading water not losing to inflation but your wealth won't grow in real terms.
4) Short of "hacks" you are limited to $10k per person. You and your husband can each buy $10k but you would need your own TD accounts.
Thanks we don't need the cash - curious what you mean on point 3. Is there no material gain when we eventually cash out?
Here is a practical example. If you left $10k in your checking account yielding 1%, you would lose money after inflation that is greater than 1%, agreed? If you put your money in an I bond you would earn more than the 1% in the checking account and a rate equal to that of inflation. Your net return after inflation is zero but it is certainly much more than the negative real rate of return you’d receive by leaving it in an account paying less than the rate of inflation. Real return is calculated as the rate you receive less the rate of inflation, if higher then you are earning a positive rate of return.

Another example, if the S&P 500 is down by 20% this year, then you are down much more in real terms because those losses are not accounting for inflation. Given the choice, and assuming the stock market doesn’t recover in year 1, holding I bonds is the better short term move. I realize equity is not the same as fixed income, this is just an example.
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