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This Risk Free Bond Now Pays 7.12%

edited November 2021 in Other Investing
Came across this elsewhere. Thought I’d pass it along.

Story on I Bonds

READ the conditions. The rate is guaranteed only for the first 6 months before it resets. Must keep for 1 year. 3 months penalty if redeemed in under 5 years. Taxes apply when redeemed.


Comments

  • IMHO, this is the best "cash" option available today if your holding period is at least one year.
    However, you can only purchase $10K of I-Bonds per year (additional $5K possible using tax refund).
  • Taxes apply when redeemed

    Just one tax - federal. Savings bonds, like Treasuries, are exempt from state and local taxes. Making their rates look even better.
  • IMHO, this is the best "cash" option available today if your holding period is at least one year.
    However, you can only purchase $10K of I-Bonds per year (additional $5K possible using tax refund).

    The $10k limit is per individual/account. Spouses can buy an additional $10k. If you have a business (LLC, partnership, self-employment), you can set up an entity account that can purchase another $10K.
    msf said:

    Taxes apply when redeemed

    Just one tax - federal. Savings bonds, like Treasuries, are exempt from state and local taxes. Making their rates look even better.

    If it’s more beneficial, you can pay taxes annually as the interest accrues.
  • edited November 2021
    MrRuffles said:

    IMHO, this is the best "cash" option available today if your holding period is at least one year.
    However, you can only purchase $10K of I-Bonds per year (additional $5K possible using tax refund).

    The $10k limit is per individual/account. Spouses can buy an additional $10k. If you have a business (LLC, partnership, self-employment), you can set up an entity account that can purchase another $10K.
    Yes, and you can also create a simple revocable living trust designated specifically for I-Bonds to purchase an additional $10K. This should not be construed as advice since I'm not certain about the potential risks of creating a trust for this purpose.

    Link

  • I wonder if an existing revocable living trust could be utilized to make such a purchase?
  • I believe that an existing revocable living trust can be used but I'm not an expert and don't know if this would be a good idea.
  • I'm a little surprised that one could circumvent the $10K limit per year by using a revocable trust. For tax purposes, revocable trusts are treated as an extension of the individual. That's different from irrevocable trusts which (except for grantor trusts) are independent tax entities.

    This is from an old Bogleheads thread regarding transfers of savings bonds into revocable trusts:
    The transfer to our Trust account transpired, but we received the following email

    "Your purchase exceeds the annual savings bond purchase limitation. Please be advised the limit is $10,000 per series and TIN per calendar year. Repeated violations mayresult in an action by this office; for example, a refund of account holdings and/or account closure may occur.
    From TreasuryDirect stating that $10K limit is per TIN:
    Effective January 4, 2012, the annual (calendar year) purchase limit applying to electronic Series EE and Series I savings bonds is $10,000 for each series. The limit is applied per Social Security Number (SSN) or Taxpayer Identification Number (TIN). For paper Series I Savings Bonds purchased through IRS tax refunds, the purchase limit is $5,000 per SSN.
    Is purchasing savings bonds in a revocable trust legal? Yes. Is it legal to use revocable trusts to circumvent the $10K/TIN/year limit? I have my doubts. It seems to work, but that doesn't mean that it is legal.

    From Nolo (regarding TINs for revocable trusts):
    A revocable living trust does not normally need its own TIN (Tax Identification Number) while the grantor is still alive.

    During the grantor's life, the trust is revocable and taxes are paid by the grantor as an individual, using the grantor's SSN (Social Security Number). In other words, when an institution requests an SSN or EIN (Employer Identification Number) for trust property, the grantor just uses his or her own SSN. When the grantor dies, the living trust becomes irrevocable and the successor trustee will get an EIN from the IRS to pay the trust's taxes.

    For shared property in shared living trusts, the grantors can use either person's SSN. When choosing which SSN to use, keep in mind that income on trust property will be reported through the SSN you select. This won't matter to couples who file taxes jointly, but it could make a difference to couples who file taxes with separate returns. For individually owned property in a shared living trust, use the owner's SSN.
  • Without regard to the SSN/TIN limit issue, the requirements for registration of a trust as an entity are pretty general without any specific limits on the type of trust:

    Trust (Trustee of a Trust). A trust form of registration is available.
  • @msf- Thanks for your excellent advice and sharing of knowledge, as usual.

    OJ
  • I asked the Treasury if an LLC with a separate TIN could buy another $10,000 and they said yes.

    I think the key is the separate TIN. If you use your own SSN on the trust ( referenced above) I think the the Treasury will link the accounts and refuse the second purchase.

    An LLC is pretty easy to set up, although you have to register it with the secretary of state, write an organizational plan and pay a fee. Some states require annual fees of up to $500, but many do not.

    If I were going to do this, I would use it for more than just $10,000 of I bonds, or at least plan to buy $10,000 a year for a while.
  • Agreed, a distinct TIN (EIN/SSN) would seem to be sufficient.

    No need to go through the process of creating an LLC. An EIN can be assigned to any business. I have an EIN as a sole proprietor - it's required to have an individual 401(k).
    https://www.nolo.com/legal-encyclopedia/when-does-sole-proprietor-need-ein.html

    That said, my sole proprietorship is legitimate - in random years I collect a bit of income (1099-MISC) doing consulting work. There are issues in declaring oneself a business without attempting to make a profit - see hobby vs. business. I don't know whether one similarly needs to be running a real business to use its EIN.
  • I think it depends on how you use your sole prop. If you do not try to deduct expenses that have no relationship to the purpose of the business, I don't think the IRS cares what you do with it.

    The treasury might, but it is hard to see how they will find out.

    I would probably ask an accountant or lawyer before I set up a sole prop for the sole purpose of buying I bonds.
  • Why would it be worth jumping through all of those hoops just to buy 10k/yr?
  • +1 old joe
  • msf
    edited November 2021
    If you do not try to deduct expenses that have no relationship to the purpose of the business, I don't think the IRS cares what you do with it.

    The IRS does care. If it regards your business as a mere hobby, e.g. because you've failed to turn a profit for years (along with other factors), then it will disallow expenses regardless of whether they're related to your "business". For example, if you make a few bucks selling photos as a hobby, you will not be able to deduct the cost of making your prints as a business expense.

    With recent tax law changes, one cannot even deduct hobby expenses as misc expenses.
    The itemized deduction for hobby expenses is completely eliminated under the Tax Cuts and Jobs Act.
    https://www.nolo.com/legal-encyclopedia/can-you-deduct-your-expenses-from-hobby.html

    LLCs are strictly state entities. At the federal level they're treated as sole proprietorships (if they have one member) or partnerships (with more than one member), unless they elect to be taxed as a corporation.
    https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-companies

    So again I suggest that there's no point in going through the process of setting up an LLC in order to get an EIN to invest in additional savings bonds. The sole proprietorship (or partnership) serves this purpose just as well without the state law/process overlay of an LLC.

    I would probably ask an accountant or lawyer before I set up a sole prop for the sole purpose of buying I bonds.
    At the federal level, a single member LLC is a sole proprietorship, so the same recommendation should apply to LLCs.
  • @msf

    I am not advocating setting up an LLC for I bonds alone, unless you live in a state where there is no annual fee for the LLC. Even then the legal fees and accounting are probably not worth it for the ability to invest another $10,000 in I bonds.

    To pay expenses out of the LLC you have to have cash in the LLC, and you indicate, a profit after expenses, at least in most years.

    I have not set up a sole proprietorship with a separate tax ID, but if this is feasible and as easy as you say, getting the additional TIN would allow you to buy more I bonds. IT will be at least five years before you can realize any return however without an interest penalty.

  • edited November 2021
    If only I could do a 100 of these per year.

    Side note: every time I add an emoji to the comment, it deletes everything after the emoji. Must be some kind of bug. It’s the 4th time I’ve tried making a comment. There’s no free lunch.
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