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So, finally opened Treasury Direct Accounts (much easier than the last time I did so years ago) and bought I bonds for wife and I. When can I expect to see earned interest in my account on Treasury Direct? Thanks!
There is a 3 month penalty for cashing Savings Bonds within 5 years. So, you should start to see interest posted AFTER 3 months. Don't worry, Uncle Sam is not stiffing you for interest (-:).
Only if cashing them after 12 months - you are totally locked in for 12 months, and then 3-mo penalty within 5 years.
Cash early in the month to get interest for the WHOLE month.
If you mean getting only the interest, then the answer is NO. You have to cash them partially electronically, or cash paper bonds in chunks.
These restrictions are the reasons that I suggest that I-Bonds be compared with 5-yr CDs (the best national rate is only 1.79%).
BTW, my guess is that those sitting on the fences may find the new I-Bond rate on May 1 too good to pass up. Don't hold me to it but MY guess is 8.8% (up from the current 7.12%).
I view savings bonds as most closely comparable to 1 year CDs, because the savings bonds are locked up for 12 months (actually as little as 11+ 1 day).
After that, while it is true that like longer term CDs, savings bonds may be redeemed early with penalty, the two are not very comparable.
CDs are yielding so much less than I bonds that even after subtracting out the penalty on an I bond early redemption, one still comes out ahead. One might as well think of the I bond as a one year savings bond yielding 5%+. At that rate it has "no penalty" and still looks better.
But it gets worse for the CDs. Typically, brokered CDs (e.g. from Schwab, Fidelity, etc.) cannot be redeemed, though there may be a small secondary market for them. Even if that market exists, with rising rates, one will still lose out. OTOH, if rates fall, longer term (e.g. 5 year) brokered CDs tend to be callable. With brokered CDs, heads one loses, tails one loses.
CDs offered through banks tend to have higher withdrawal penalties for longer term maturities. This is another reason why I prefer to compare savings bonds with 1 year CDs.
Marcus Bank has a typical penalty schedule: 90 days interest on one 1 year CDs, and 180 days on CDs up to and including 5 years. Ally Bank is a bit better, charging just 60 days for CDs up to and including 2 years, 90 days for CDs more than 2 years up to and including 3 years, 120 days for CDs up to 4 years, and 150 days for CDs of 4 years or more.
Baseball_Fan mentioned taxes. Interest on CDs is taxable annually (even if you leave it in the CD), unless the CD is for a term of one year or less. Taxes on savings bonds are deferred until redemption (unless you elect to recognize interest annually). Thus only CDs of one year or less get the same tax treatment (deferred until maturity) as savings bonds.
Yogi offered an excellent estimate of the upcoming I bond rate. I don't know how much of this was done seat of the pants and how much analysis was involved, but here's how the figure can be computed:
8.8% annual rate means 4.31% semi annually: (1+4.31%) x (1+4.31%) = 1 + 8.8%
The CPI in Sept. 2021 was 274.31. Adding 4.31% gives us a March 2022 CPI of 286.125.
M/M that's 0.85% inflation from Feb (CPI of 283.716). Feb's M/M rate was 0.91%, Jan's was 0.84%, Dec's was 0.31%, Nov's was 0.49%.
With oil prices moderating (albeit with wild swings), it's reasonable to look for at least a slight reduction in the high rate of inflation lately. By the seat of the pants (the attire has to come in somewhere), a M/M rate similar to Jan's and a tad below Feb's looks good.
I extrapolated March 2022 CPI-U (unadjusted) from January 2022, and also from February 2022 (the graph is almost linear). Then knocked off the 2nd decimal to give some wiggle room (Treasury announces rate to 2 decimal places). So, not as mysterious as it may have sounded.
Okay, so here's a question... Considering that the yield should probably rise over time, at what point (if any) might one consider trading in their existing I-Bonds and buying newer ones? I know there are some issues with doing that, but it SEEMS a logical move. Can I pursue that idea a little with the more-knowledgeable folk on here?
Does the increase in interest equal the penalty + one is only able to buy $10K - PLUS so much in a tax refund. Thought about having a large amount withheld for taxes, then from refund buy more Ibonds. Amount aloud to buy from refund is also limited.
@racqueteer, for I-Bonds, the new inflation rate will apply to existing bonds with some delay. The rate cycle starts with 6 months at the "current rate" from the purchase date, then another 6 months for the "new" rate, and so on. Think of it as applying rates with a phase shift. So, it doesn't make sense to trade old I-Bonds UNLESS the fixed rate changes significantly and inflation rate also remains high.
EE-Bonds are different. The rate at the time of purchase is locked in for 30 years and that rate is a terrible 0.10%. But EE Bonds are guaranteed to DOUBLE on 20 years + 1 day, so that is one-time realized rate of 3.53% annualized (if held for 20 years + 1 day). I don't recommend new EE Bonds although the old pre-2005 bond are OK to hold to maturity.
@yogibearbull : The bigger question , IMO, can one exchange I-bonds or must you sell & then buy. That would leave one with $10K in I-bonds over two years instead of a total of $20K. Thanks, Derf
@Derf, there is no provision to "Exchange" Savings Bonds. You can only "Buy", "Redeem", or "Replace/Reissue" (if lost or stolen).
It used to be that one could "Exchange" Savings Bonds for income HH-Bonds to further extend tax deferrals, but those were discontinued in 2004 (Edit: for new issuance; the existing ones remain).
You can only "Buy", "Redeem", or "Replace/Reissue" (if lost or stolen).
Going off on a tangent: In addition to lost or stolen savings bonds, one may need to replace a savings bond because it was never received. Last week I received 11 out of 12 paper savings bonds (in 11 separate envelopes!) issued as part of my tax refund. Thank you USPS.
Since I never received the last one, I can't say I lost it. It seems that the Treasury Department agrees. Rather than using Form 1048 to replace lost, stolen, or destroyed savings bonds, one files Form 3062-4 for savings bonds never received.
Even though my savings bond was in paper form, the Treasury Department will reissue it only in electronic form. Relating back to Yogi's comment, HH bonds are the exception here too. They can be reissued in paper form.
@msf : More questions ? I take it they were I-bonds ? Were you planing on using them for gifts or do you have another plan for them ? If I may ask, Derf
Yes, I bonds. One can eek out another $5K in savings bond purchases by overpaying on one's Jan 15th tax estimate. Add enough to create a $5K refund to buy the bonds.
The paper bonds are in my name, and I'll send them right back to the Treasury to reregister them in electronic form.
Also I believe I-bonds are entirely tax free if proceeds are used for educational purposes but do your research, don't quote me on it.
I-Bonds are a very sweet deal right now, nothing else in fixed income comes even close. I loaded up in Dec 2021, loaded up again in Jan 2022 and might even load up some more under the gift allowance.
My usual problem, where can I buy I-bond at 1 million Dollar + be able to cash out within 6-12 months and buy something else? This is why I never bought directly. I wish there was an ETF/OEF that pays half of I-bonds with more flexibility and much bigger amounts as you do with treasuries OEF.
Must be tough not knowing what to do with an extra $1M ...
I’ve stayed away from this vehicle not wanting to restrict my fixed income investments in any way. Probably dumb on my part, as 7% today is kind of like giving candy away. But I value the simplicity and flexibility of having that money available for other investment at any time. And, to an extent, more traditional bonds / bond funds help provide an element of portfolio balance.
ISTM the 7% I Bond is ideal for those who maintain several years’ anticipated expenses separate from their more aggressive portfolio. I’ve never done that. Withdrawals, both the anticipated and the unexpected, come out of the whole investment pot.
Savings bonds don't have to be held for years. One can cash them out after a year if one wants. At current rates they'll still net 5%+, which is still "kind of like giving candy away".
"Withdrawals, both the anticipated and the unexpected, come out of the whole investment pot."
The usual expectation is that one won't cash out (withdraw) 100% of one's portfolio within a year. Given that expectation, there's going to be some money, say at least $10K, that will remain in fixed income investments for a year.
For that $10K that we know isn't going to be withdrawn, it's hard to find a better place to keep it than in I-bonds. There's a guaranteed 5%+ rate of return, which is more than one hopes for this year with most fixed income investments. Then there's the guarantee that one won't lose principal (no interest rate risk). And as an added bonus, no credit risk.
I could move some of the money in PRIHX into I Bonds. But I’m not moved to do so. Don’t like selling at the bottom. Very little committed to cash. Less than 8% of entire portfolio presently. Cash facilitates my (too frequent) tactical moves. With I Bonds you’re sacrificing liquidity for a year. Dow drops to 15,000 in 3 months and you’d not have that cash to throw at stocks. Further, aside from PRIHX everything is in IRAs. Pull from the Roth to buy I-Bonds? Pull from the Traditional and pay taxes on the distribution?
Agree I-Bonds are a great investment. I think I was the one who first posted the information when the yield topped 7%. Here
7% is indeed an impressive one year return. But about what a good mining fund might be expected to bounce in 1 or 2 day’s time. Just trying to inject a little perspective. ISTM there’s no guarantee that 7% return will be continued after a year. There we’re making assumptions just as with any other investment ... albeit, if you’re benchmarking to the CPI it doesn’t matter.
“more than one hopes for this year” - Umm ... PRIHX is due for a nice bounce ISTM. All it needs to do is finish 2022 at “break even” (0% return) and I’d achieve a 6+% tax free gain between now and year’s end.
One can eek out another $5K in savings bond purchases by overpaying on one's Jan 15th tax estimate. Add enough to create a $5K refund to buy the bonds.
With year-end distribution, it is often not easy to estimate how much to “overpay” the additional $5K.. Also why Jan 15th and not say Dec 15th for 2022 tax reporting? Please advise. Thanks.
By the way, we started to invest in I bonds in 2021 based on this board’s recommendation. We owed a small amount to IRS. So we will plan better for 2022.
One generally has until Jan 15th to make estimated payments for the previous year. For example, one could make estimated payments for 2021 taxes through Jan 18, 2022. (It's the 18th because the 15th is a Saturday, and the following Monday, the 17th, is MLK Day.)
While one won't have 1099s that soon (except perhaps from some banks), nearly all the fund divs will have been paid. So, aside from unusual situations like K-1s, one can have a very good idea of one's tax liability by then.
What's the worst that can happen if you're off a bit? Pay a little less than planned and you may only be able to get $4800 or so in I-bonds. Pay a little more and you'll get a bit more in a refund. Uncle Sam will only be holding that overpayment for at most three months (Jan 15 until April 15).
For those taking RMD's, one could take $5K more at end of year & have all forwarded to IRS as tax payment. Then it is received back as a refund . I guess tax would be due on the $5K so one would have to fig their tax rate & adjust upward additional their extra RMD withdrawal. Hopefully this doesn't jump you to the next tax bracket.
Don’t like selling at the bottom. ... Umm ... PRIHX is due for a nice bounce ISTM. All it needs to do is finish 2022 at “break even” (0% return) and I’d achieve a 6+% tax free gain between now and year’s end.
Why is the fund due for a nice bounce? We are at the end of a 40 year secular decline in interest rates. If one is just looking at trends, ISTM that we're due for a nice, long bounce in interest rates. That in turn means a continued decline in NAV. At best, perhaps a pause as investors begin to find current rates attractive.
Chart of 20 year maturity muni bond rates from 1972 to now (from MuniBondAdvisor)
With I Bonds you’re sacrificing liquidity for a year. Dow drops to 15,000 in 3 months and you’d not have that cash to throw at stocks.
Assume your best case scenario, that Dow drops nearly 60% in three months. (Hard to call that a best case, but whatever ...)
(a) Would you expect bonds of any sort (aside from Treasuries) to go up then, or aside from a possible flight to quality, would you expect bonds to fall? I ask this because you don't like selling at the bottom. So you might not make the trade if bonds were continuing to fall.
(b) If you did sell, would you sell 100% of your fixed income (PRIHX) to purchase stocks? ISTM that would be betting the farm on catching a falling knife. The alternative is that you would continue to hold some fixed income - not for trading purposes, but as ballast.
Unless (a) you would trade and (b) you would move 100% into equities, the question is not one of liquidity, but of choosing the superior one year fixed income investment: PRIHX or I-bonds.
Hindsight is 20/20 and there's no use crying over spilt milk. Still, FWIW, you pointed out the higher rates for I-bonds in Nov. Since Nov 1, the I-bonds have gained 5/6 x 3.56% = 3%, while PRIHX has lost 5.25% (6.5% NAV).
What really matters is what will happen going forward. ISTM there’s no guarantee that 7% return will be continued after a year. There we’re making assumptions just as with any other investment
We just have to make assumptions for the next year. The I-bond will return over 5%, net, after withdrawal penalty, if purchased this month. The only assumption I'm making is that the next inflation adjustment (to be announced in a few days) will be at least 6% (3% semi-annually).
Calculation: 3.56% for six months, and 1/2 of 3% for the next six months after penalty comes to 5%.
There's certainly a case to be made for not losing hope on fixed income funds. Charles made it in his column this month. But it requires patience. More than twelve months worth of patience.
Comments
Cash early in the month to get interest for the WHOLE month.
If you mean getting only the interest, then the answer is NO. You have to cash them partially electronically, or cash paper bonds in chunks.
These restrictions are the reasons that I suggest that I-Bonds be compared with 5-yr CDs (the best national rate is only 1.79%).
BTW, my guess is that those sitting on the fences may find the new I-Bond rate on May 1 too good to pass up. Don't hold me to it but MY guess is 8.8% (up from the current 7.12%).
From Schwab- New 5-yr issues:
Beal Bank USA NV 2.7% CD 04/14/2027
Synchrony Bank UT 2.7% CD 04/14/2027
Beal Bank TX 2.7% CD 04/14/2027
Capital One Bank US VA 2.7% CD 04/13/2027
Also a number of issues at 2.65%
After that, while it is true that like longer term CDs, savings bonds may be redeemed early with penalty, the two are not very comparable.
CDs are yielding so much less than I bonds that even after subtracting out the penalty on an I bond early redemption, one still comes out ahead. One might as well think of the I bond as a one year savings bond yielding 5%+. At that rate it has "no penalty" and still looks better.
But it gets worse for the CDs. Typically, brokered CDs (e.g. from Schwab, Fidelity, etc.) cannot be redeemed, though there may be a small secondary market for them. Even if that market exists, with rising rates, one will still lose out. OTOH, if rates fall, longer term (e.g. 5 year) brokered CDs tend to be callable. With brokered CDs, heads one loses, tails one loses.
CDs offered through banks tend to have higher withdrawal penalties for longer term maturities. This is another reason why I prefer to compare savings bonds with 1 year CDs.
Marcus Bank has a typical penalty schedule: 90 days interest on one 1 year CDs, and 180 days on CDs up to and including 5 years. Ally Bank is a bit better, charging just 60 days for CDs up to and including 2 years, 90 days for CDs more than 2 years up to and including 3 years, 120 days for CDs up to 4 years, and 150 days for CDs of 4 years or more.
Baseball_Fan mentioned taxes. Interest on CDs is taxable annually (even if you leave it in the CD), unless the CD is for a term of one year or less. Taxes on savings bonds are deferred until redemption (unless you elect to recognize interest annually). Thus only CDs of one year or less get the same tax treatment (deferred until maturity) as savings bonds.
8.8% annual rate means 4.31% semi annually: (1+4.31%) x (1+4.31%) = 1 + 8.8%
The CPI in Sept. 2021 was 274.31. Adding 4.31% gives us a March 2022 CPI of 286.125.
M/M that's 0.85% inflation from Feb (CPI of 283.716).
Feb's M/M rate was 0.91%, Jan's was 0.84%, Dec's was 0.31%, Nov's was 0.49%.
With oil prices moderating (albeit with wild swings), it's reasonable to look for at least a slight reduction in the high rate of inflation lately. By the seat of the pants (the attire has to come in somewhere), a M/M rate similar to Jan's and a tad below Feb's looks good.
CPI monthly figures: https://data.bls.gov/cgi-bin/surveymost?bls
Crude oil interactive graph: https://tradingeconomics.com/commodity/crude-oil
I extrapolated March 2022 CPI-U (unadjusted) from January 2022, and also from February 2022 (the graph is almost linear). Then knocked off the 2nd decimal to give some wiggle room (Treasury announces rate to 2 decimal places). So, not as mysterious as it may have sounded.
Hope this makes sense, Derf
EE-Bonds are different. The rate at the time of purchase is locked in for 30 years and that rate is a terrible 0.10%. But EE Bonds are guaranteed to DOUBLE on 20 years + 1 day, so that is one-time realized rate of 3.53% annualized (if held for 20 years + 1 day). I don't recommend new EE Bonds although the old pre-2005 bond are OK to hold to maturity.
Thanks, Derf
It used to be that one could "Exchange" Savings Bonds for income HH-Bonds to further extend tax deferrals, but those were discontinued in 2004 (Edit: for new issuance; the existing ones remain).
Going off on a tangent: In addition to lost or stolen savings bonds, one may need to replace a savings bond because it was never received. Last week I received 11 out of 12 paper savings bonds (in 11 separate envelopes!) issued as part of my tax refund. Thank you USPS.
Since I never received the last one, I can't say I lost it. It seems that the Treasury Department agrees. Rather than using Form 1048 to replace lost, stolen, or destroyed savings bonds, one files Form 3062-4 for savings bonds never received.
Even though my savings bond was in paper form, the Treasury Department will reissue it only in electronic form. Relating back to Yogi's comment, HH bonds are the exception here too. They can be reissued in paper form.
If I may ask, Derf
The paper bonds are in my name, and I'll send them right back to the Treasury to reregister them in electronic form.
Just your usual government bureaucracy in action.
I-Bonds are a very sweet deal right now, nothing else in fixed income comes even close. I loaded up in Dec 2021, loaded up again in Jan 2022 and might even load up some more under the gift allowance.
This is why I never bought directly.
I wish there was an ETF/OEF that pays half of I-bonds with more flexibility and much bigger amounts as you do with treasuries OEF.
I’ve stayed away from this vehicle not wanting to restrict my fixed income investments in any way. Probably dumb on my part, as 7% today is kind of like giving candy away. But I value the simplicity and flexibility of having that money available for other investment at any time. And, to an extent, more traditional bonds / bond funds help provide an element of portfolio balance.
ISTM the 7% I Bond is ideal for those who maintain several years’ anticipated expenses separate from their more aggressive portfolio. I’ve never done that. Withdrawals, both the anticipated and the unexpected, come out of the whole investment pot.
"Withdrawals, both the anticipated and the unexpected, come out of the whole investment pot."
The usual expectation is that one won't cash out (withdraw) 100% of one's portfolio within a year. Given that expectation, there's going to be some money, say at least $10K, that will remain in fixed income investments for a year.
For that $10K that we know isn't going to be withdrawn, it's hard to find a better place to keep it than in I-bonds. There's a guaranteed 5%+ rate of return, which is more than one hopes for this year with most fixed income investments. Then there's the guarantee that one won't lose principal (no interest rate risk). And as an added bonus, no credit risk.
Agree I-Bonds are a great investment. I think I was the one who first posted the information when the yield topped 7%. Here
7% is indeed an impressive one year return. But about what a good mining fund might be expected to bounce in 1 or 2 day’s time. Just trying to inject a little perspective. ISTM there’s no guarantee that 7% return will be continued after a year. There we’re making assumptions just as with any other investment ... albeit, if you’re benchmarking to the CPI it doesn’t matter.
“more than one hopes for this year” - Umm ... PRIHX is due for a nice bounce ISTM. All it needs to do is finish 2022 at “break even” (0% return) and I’d achieve a 6+% tax free gain between now and year’s end.
By the way, we started to invest in I bonds in 2021 based on this board’s recommendation. We owed a small amount to IRS. So we will plan better for 2022.
While one won't have 1099s that soon (except perhaps from some banks), nearly all the fund divs will have been paid. So, aside from unusual situations like K-1s, one can have a very good idea of one's tax liability by then.
What's the worst that can happen if you're off a bit? Pay a little less than planned and you may only be able to get $4800 or so in I-bonds. Pay a little more and you'll get a bit more in a refund. Uncle Sam will only be holding that overpayment for at most three months (Jan 15 until April 15).
Random thoughts, Derf
Why is the fund due for a nice bounce? We are at the end of a 40 year secular decline in interest rates. If one is just looking at trends, ISTM that we're due for a nice, long bounce in interest rates. That in turn means a continued decline in NAV. At best, perhaps a pause as investors begin to find current rates attractive.
Chart of 20 year maturity muni bond rates from 1972 to now (from MuniBondAdvisor)
With I Bonds you’re sacrificing liquidity for a year. Dow drops to 15,000 in 3 months and you’d not have that cash to throw at stocks.
Assume your best case scenario, that Dow drops nearly 60% in three months. (Hard to call that a best case, but whatever ...)
(a) Would you expect bonds of any sort (aside from Treasuries) to go up then, or aside from a possible flight to quality, would you expect bonds to fall? I ask this because you don't like selling at the bottom. So you might not make the trade if bonds were continuing to fall.
(b) If you did sell, would you sell 100% of your fixed income (PRIHX) to purchase stocks? ISTM that would be betting the farm on catching a falling knife. The alternative is that you would continue to hold some fixed income - not for trading purposes, but as ballast.
Unless (a) you would trade and (b) you would move 100% into equities, the question is not one of liquidity, but of choosing the superior one year fixed income investment: PRIHX or I-bonds.
Hindsight is 20/20 and there's no use crying over spilt milk. Still, FWIW, you pointed out the higher rates for I-bonds in Nov. Since Nov 1, the I-bonds have gained 5/6 x 3.56% = 3%, while PRIHX has lost 5.25% (6.5% NAV).
What really matters is what will happen going forward.
ISTM there’s no guarantee that 7% return will be continued after a year. There we’re making assumptions just as with any other investment
We just have to make assumptions for the next year. The I-bond will return over 5%, net, after withdrawal penalty, if purchased this month. The only assumption I'm making is that the next inflation adjustment (to be announced in a few days) will be at least 6% (3% semi-annually).
Calculation: 3.56% for six months, and 1/2 of 3% for the next six months after penalty comes to 5%.
There's certainly a case to be made for not losing hope on fixed income funds. Charles made it in his column this month. But it requires patience. More than twelve months worth of patience.