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I Bond Question

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Comments

  • Derf said:

    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 .

    You may mean for those over 59½, i.e. for those not subject to early withdrawal penalties. It doesn't matter whether one is subject to RMDs or not.

    I'm generally not fond of taking money out of tax-sheltered accounts unless one must - either for RMDs or because one has current needs for the money. Though savings bonds do defer taxes until one redeems them. However, one can't switch from savings bonds into another investment without taxes coming due. One has more flexibility with IRAs.



  • edited April 10
    Savings Bonds that qualify for educational expenses can be rolled into 529 plans. Rules are not very difficult in spite of a long list of conditions. This doesn't improve liquidity but is an exception to their taxable sale. https://www.treasurydirect.gov/indiv/planning/plan_education.htm
    https://www.savingforcollege.com/article/how-to-rollover-us-savings-bonds-into-a-529-plan
  • edited April 10
    @msf - First, thank you for your detailed response and for all the dedicated work you do at MFO. Folks are fortunate for your labors.

    I believe that you and others are making lots of assumptions. Nothing wrong with that. So far, over the past 3 or more years the Fed has raised the overnight lending rate by 25 basis points. That’s the fact. The bond markets, however, have gone into hysteria.

    If there was an easy way for me to reap that 7% reward on I Bonds (more like 5% if you cash out early) I’d do it. But I’m not willing to upset my “perfectly balanced” apple cart (forgive the exaggeration) by selling a long-term holding just because it’s off 6% this year and something else offers a short term guaranteed return.

    I’d never argue that PRIHX is as safe as I-Bonds. Just that it already has a well thought out place in the portfolio. I’ve owned it for several years. It’s run very conservatively (reason it scores poorly by M* standards). I have so much confidence in it I recently took advantage of the (likely overdone) sell-off this year by tossing in a chunk of household cash that won’t be needed for six months or longer.

    Frankly, to earn 5% on $10,000 isn’t going to move the needle very much for me. I’d rather dwell on the riskier portions of the portfolio. Those include 3 individual stocks, a gold mining fund, 2 nation specific funds (invested in Japan and Norway), both market neutral and long-short funds, a global bond fund, plus a half dozen broadly based equity funds. That’s where my “investment brain” is normally focused. Those are the investments that move the needle for me and, working together, achieve the balance I desire in the portfolio.

    On a lighthearted “sour” note, I do believe the recent clamor by every Tom, Dick & Harry to “scoop up” those hot 7% (err ... 5%) I Bonds is one reason my own PRIHX and most other short - intermediate term bond funds have suffered this year. Yikes - hot money has been fleeing ...:)


    Re: “Would you expect bonds of any sort (aside from Treasuries) to go up then, or aside from a possible flight to quality?”

    @msf - I suspect your intended inference here is correct. But I don’t want to own only investments I “expect” to do well. I like it when some things rise while others fall. And get nervous when everything is rising all at once. The future is impossible to predict. But there certainly are a few experienced market observers predicting falling rates longer term. That’s not my belief - but it’s out there along with every other possibility.
  • edited April 10
    Old_Joe said:

    OK, we're very impressed. You can go away now.

    As a trader, I'm out for weeks(only use short term trades) and looking to park my money somewhere until I find better opportunities. Let me know where can I park $100K now?

    As expected, the only bond category that made money (only several funds) YTD was bank loans.

  • You are far from the only one with that problem. Most of us don't feel the need to flaunt how much cash we hold that could be put to better use.
  • The M* bank loan category lost money YTD.

    By category return, M* means "simply the average of the returns for all the funds in a given category. The standard category average calculation is based on constituents of the category at the end of the period."

    For bank loan funds YTD, I offer two figures:
    Daily return through April 8, 2022: -0.23%
    Quarterly return through March 31, 2022: -0.55%

    Data source:
    https://performance.morningstar.com/fund/performance-return.action?t=FDAAX

    (See the category line in the Trailing Total Returns section; click on quarterly tab for quarterly data.)

    Certainly there are some bank loan funds that made money YTD. The link above (FDAAX) is one such fund. There are also bond funds in several other categories that made money YTD, including:

    High yield bond, e.g. RSIVX 0.50%/0.83% (daily/quarterly)
    Inflation protected, e.g. EARRX 0.17%/0.36%
    Multisector, e.g. ICMUX 0.05%/0.16%
    Muni short, e.g. FHMIX 0.08%/0.07%
    Nontraditional, e.g. RPIEX 3.98%/2.98%
    Short term, i.e. CMFIX 0.10%/0.29%
    Ultrashort, e.g. REPOX 0.08%/0.07%
    World bond, e.g. TPINX 1.14%/1.14% [sic]
  • @msf- Isn't there a $1,000,000 "spare cash" threshold requirement to comment on this sort of thing?
  • Of course. I checked each fund's availability against that threshold. $1,000,000 will just get you in the door at CMFIX.

    You don't think I'd go posting funds with a $100M min?
  • edited April 11
    Have never had any interest (pun intended) in these due to low maximum. Often wondered why the max was so low… here’s a few links that explain the reasoning. Not sure it’s a good explanation but…

    https://www.forbes.com/2010/02/25/i-bonds-purchase-limits-tips-personal-finance-bogleheads-view-lindauer.html?sh=54071b7252b8

    “ Here's how the Treasury tried to explain the lowering of the annual purchase limits when it announced on Dec. 3, 2007 that the new limits were to take effect on Jan, 1, 2008: "The reduction from the $30,000 annual limit in effect for both series since 2003 was made to refocus the savings bond program on its original purpose of making these non-marketable Treasury securities available to individuals with relatively small sums to invest."” <—- those with small sums have always been able to invest.

    How to increase past the 10k/15k
    https://www.freep.com/story/money/personal-finance/susan-tompor/2021/12/21/savers-can-rush-make-year-end-move-put-more-money-bonds/6500031001/

    https://www.thebalance.com/what-are-the-series-i-savings-bond-annual-purchase-limits-357550
  • Buying I-Bonds as gifts is a good way to bypass the low annual limit. But the gifts are irrevocable. Here are some practical tips, https://thefinancebuff.com/buy-i-bonds-as-gift.html
  • edited April 15
    Here’s another I-Bond question, rather than starting a new thread. I opened a Treasury Direct account in January and purchased the maximum individual amount ($10K). I would like to purchase another $10K in my wife’s name. Do we have to create another TD account in her name, or can I purchase the bonds through my existing account? Or could I purchase the bonds for her as a gift?

    I searched through the FAQs at the TD site but couldn’t find any questions addressing this issue.
  • She will need her own Treasury Direct account. In the meantime, you can buy gift I-Bond for her and hold them in your account. You can even buy more than $10K to be distributed slowly later into her Treasury Direct account. See details here, https://ybbpersonalfinance.proboards.com/post/577/thread
  • Thanks, Yogi. I guess we’ll have to create another account. I was reluctant to buy iBonds in the first place due to the potential for my wife forgetting about the account if I died before her, but it’s hard to pass up the current rates when virtually every other asset sucks right now.
  • I also need to decide whether to buy now at the current rate or wait until they set a new, presumably higher rate in May.
  • msf
    edited April 15
    If you're planning to buy and then sell after 12 months, you can compare your choices:

    If you buy now, you'll get 3.56% (six months) + 4.81% (six months) - 1/2 x 4.81% (3 mo. penalty) ≈
    1.0356 x 1.024 ≈ 1.060 or 6%

    If inflation over the next six months is 3.35% (6.8% annualized) or less, then by buying in May you'll get no more than: 1.0481 x 1.01175 = 1.060 or 6%.

    So if your plan is to hold just for a year, you'll do better waiting if inflation over the next six months runs hotter than 3.35% (6.8% annualized).

    -----

    An alternative is to wait an extra three months, so that you get the full year's interest and then the penalty just means that the extra three months are interest-free.

    In that case, the question is simpler. Do you expect inflation over the next six months to be more or less than 3.56% over six months (7.2% annualized), i.e. the rate you'd get today?
    -----

    Another alternative is to hold the savings bonds until there is no penalty. Then the question is similar to the last one: At the time you redeem, do you expect rates to be more or less than 3.56% (7.2% annualized). If the final period has lower inflation, you'd be better off locking in the current 3.56% rate. If the final period has higher inflation, then you'd be better off skipping the current rate and instead getting the rate from that last period.

    Me, I'm satisfied getting 3.56% over six months, and don't feel the likelihood of doing better outweighs the risk of doing worse, perhaps a lot worse, than that. Others may feel that inflation has just begun and prefer to wait 'till May to get even higher rates going forward.
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