Getting paper Ibonds this way is also a way to bypass the 10k annual limit for an individual. You can use a tax refund to purchase an additional 5k within the year, enabling a total of 15k per year.
You’d have to do it preemptively though as the last opportunity to over is via a Jan 15th estimated tax payment. You can’t retroactively overpay, the money needs to be there before you file your taxes.
You don't have to make an estimated tax payment. You can also file an extension, and when you do that you can make a payment with IRS direct pay as well. Also just because you filed for an extension, that doesn't mean you have to file your tax return later, so you can just file your tax return when you would regularly payment. You can file for an extension much later than Jan 15th, I think the deadline is sometime in April.
Definitely do NOT misfile your return such that you get a large refund as I Bonds and then file a corrected return where you pay back. It's not legal and it's not worth it.
I didn’t say misfile. I suggested making an estimated tax payment so that you have net credit at the IRS. It’s the same as applying your refund to the following year’s taxes. There’s no filing or claim of income, you’re simply parking money there to cover potential taxes.
To do what I’m suggesting correctly, you’d calculate your tax liability or surplus before the last estimated tax payment date (Jan 15th) and make an estimated payment for the difference between that and the amount of I series bonds you’d like to purchase.
Do you have a source for this? Where is it stated that one cannot overpay taxes for the purpose of getting a bigger return? Many people do this as a “savings” account as they’re not very good with savings so it sort of forces them to save since they don’t have access to the money.
I believe he was suggesting misfiling, as in under reporting income or overreporting deductions in order to generate a fraudulent refund, which you could then fix/repay in cash (but keep the bonds).
Or using it as your emergency fund. Just keeping in mind that you should probably ladder your emergency fund into them, since they're locked up for 1 year.
That's the point of the ladder - after a year or two you can access much of it at anytime. Buy 1k this year and 1k next year, and your accessible emergency fund is 1k - but from then on it grows 1k a year if you keep purchasing; only the last purchase isn't immediately available.
I am potentially earning $40-80 on interest over a year, but I lose access to $1000 ear-marked specifically for emergencies.
If it's truly an emergency, then you're better off with $1000-inflation. Maybe get a high-yield savings account and split the difference ($20/yr, but access at any time).
I will concede that people have different definitions of "emergency" funds. I see it as, $500-1000 sitting in an account to deal with things that need to paid for now or else bad things will happen. So sudden car repairs and the like.
Other people call six months of wages an emergency fund. For these people, yeah, a ladder makes a lot of sense, but that's mostly because they never really expect to need the entire amount immediately (thus, IMHO, not really an emergency fund).
Start with an emergency fund, do this in place of investing on top of it, then after it is laddered replace the emergency fund with this and invest the former emergency fund (or gradually replace things over time as the lockup frees up).
It's still so much work and risk for almost no gain.
I have $1000, so I split it up $500 in cash, $500 in a bond. Next month, my car needs new tires or I can't get to work. New tires are $800, and I can't afford that half my emergency fund is tied up. I lost shifts at work because of this, but at least I got a $30 return (never mind each lost shift cost me $70).
Emergency funds are for high impact, unpredictable events.
I think the concepts of "emergency funds" being discussed are different here. There are the $1000 "I need cash now" emergency funds. Then there are the 6-12 month "I lost my job" emergency funds. I think you're discussing the former, while others are discussing the latter.
I agree with you that you should not put the former in anything less liquid than a savings account.
The latter, however, lends itself very nicely to laddering months of savings over months of layered investments. So that every month, the next month of your savings becomes free.
Emergency funds are a safety net when everything is crashing and you lose your job. This way you don't need to sell off your stocks which would be lower if there was a crash. Otherwise, you would be realizing your loses.
You seem to be looking a this from a someone that is young angle and doesn't have much expenses. My expenses are high, therefore my emergency fund is high. I keep $40k in cash, if can move $20k to I-Bonds that is $1600 a year. No other place will GUARANTEE that return. It took me all of 15 minutes. If you can offer me a greater GUARANTEED return I'm all ears.
You're not understanding. You always have $1000 of non-tied up funds. Start with $1000 cash. Then, instead of investing your next $500, put it in bonds. After a year, remove $500 cash from the emergency fund and invest it. You now have an emergency fund of $500 cash and $500 withdrawable bonds.
When people suggest using I bonds as emergency funds it's usually recommended in addition to at least a few thousand that remains in a savings/checking account for immediate withdrawal.
The liquidity requirement of an emergency fund varies based on the amount of savings capability a person has, and the type of emergency they want to save for.
Someone living paycheck to paycheck will likely need 100% liquidity, and someone who is wealthier might only need a single-digit percent liquidity.
Like a stock sale, you don't pay taxes on the interest until you cash in the bond (you can, but for most cases you shouldn't). It will be regular income rather than long-term capital gains however. A regular savings account will require you to pay taxes annually as regular income. I-Bond interest is not subject to state or local taxes, so there's a savings there compared to a savings account.
If you really hate paying taxes, you can cash them tax-free if you use them to pay for qualified educational expenses. There are income limits for this that probably eliminate the typical poster to this site but for people in the right situations it can be useful.
I just think the band-aid is absurd of the government paying you interest matching inflation which they themselves caused which is then taxed to go back to the government so they can spend it and cause more inflation.
Taxing it back causes deflation (or “counteracts inflation”.) They don't need to tax it to spend it, because the government has essentially infinite borrowing abiliry, so literally all taxing it back does is counteract inflation. (OTOH, giving you the inflation-indexed bond itself caused more inflation, so if your beef is with causing more inflation...)
Yes, but the thing you have to be careful of is if you switched banks. They require you to jump through hoops to update your bank on TreasuryDirect. So if you change banks, you should begin the process to update with TD right away, so you don't get a nasty surprise if you need to cash out quickly in the future.
Correct, though if you go the paper route via tax returns you can "cash" the paper bonds at any bank at any time (or maybe it has to be a bank you have an account with already).
Tax overpayments, only -- the limit of $10000 of electronic bonds per recipient, from whatever source.
> The purchase amount of a gift bond counts toward the annual limit of the recipient, not the giver. So, in a calendar year, you can buy up to $10,000 in electronic bonds and up to $5,000 in paper bonds for each person you buy for.
>While waiting for the May 1 reset might look tempting to launch directly into the 9.62% rate, I still strongly recommend buying I Bonds before April 30, which will lock in a 7.12% rate for a full six months, followed by 9.62% for six months. That’s an annual rate of about 8.4%, and there is no other very safe investment that can match that return.
>I Bonds must be held for 12 months before you can redeem them. If you redeem them before five years, you will forfeit the last three months of interest. But if you buy near the end of April 2022, you will get full credit for April and can redeem 14 months and a few days later, avoiding taking the interest penalty on the 9.62% rate.
>However, I always recommend buying I Bonds every year up to the purchase cap of $10,000 per person per year and holding them until you actually need the money. People who have been buying I Bonds for years — like many of my readers — are very happy right now, collecting an annual rate of 8.4%, plus any fixed rate attached to the original purchase.
There's also a fixed yield part of iBond interest. Currently that's 0%, but perhaps it will be something around 0.5% due to the Fed raising rates? That could be an incentive for waiting until May to buy.
> I still say “no,” but conditions are getting better for a fixed rate higher than the current 0.0%. The real yield of a 10-year TIPS has now “surged” to -0.12%, an impressive rise of 85 basis points since the beginning of the year. But until it gets to at least 0.25%, I think it’s unlikely the Treasury will increase the I Bond’s fixed rate. We might see the rate rise in November, which would be available to grab when the calendar resets in January.
> My advice: Don’t be waiting for a higher fixed rate that might never come, and miss out on the chance to make $840 on a $10,000 investment in one year. Invest up to the cap before May 1.
I decided to go in and buy some I-Bonds for the first time. To do this you need to make an account with https://www.treasurydirect.gov/. My god this was a shockingly bad experience filled with security theater.
* Passwords must be at least 8 chars, but can't be longer than 16 (they don't tell you the max length though
* Passwords can't have \
* Passwords are case-insensitive
* When you actually try to log in they make you use a virtual keyboard - meaning you have to use your MOUSE to click each individual character which is shown on screen in plain text. The keyboard does not work on purpose, and password manager don't work either.
From their security FAQ -
> Virtual Keyboard: The virtual keyboard is one of many security features introduced in TreasuryDirect as part of our on-going commitment to heightened password and account security. The advantage of using the virtual keyboard is that others are deterred from learning your password.
It reminds me of that video from a while back of UX designed by the devil. I know its government, but what an awful experience.
Dublin bike hire does it, including shuffling the numbers. I could almost understand it at the terminals at bike hire points, but they do the same on their web interface.
Of course the real insecurity is they assign you a fixed numeric 6 digit PIN.
re virtual keyboards: thwarts physical keyloggers. it thwarts kernel keyloggers too, but if you have a kernel keylogger kernel mitm is also a possibility (minus bandwidth costs.) eons ago I had an hsbc card with random digits sent to me. the hsbc login asked for a random subset of the digits on the card + password which would thwart short-lived mitms — thinking back, that was pretty clever
Sounds like what Canada Revenue Agency has up now as well, their 2FA setup gives you a 5x5 grid of random 3-letter combos, and when logging in they'll ask you for a specific three of them.
Honestly it's a PITA (I need to keep said PDF vaguely handy, and it's stored less securely than in my password manager).
I found that it works to right-click the password field input, inspect and edit the html element, and paste my password from my password manager into the "value" property before submitting.
It's still annoying, but I think it beats using their virtual keyboard.
I have tried three browsers to get an irs.gov login and none works completely, there’s a failure on one step or another and they are using some third party login service.
Are you using ad blockers, tracking protection or enhanced browser security? Consider using a stock Google Chrome installation from a desktop computer.
I’m not defending the “good enough for government” mentality but merely suggesting some workarounds (FWIW it works on my computer.)
I don't get why it's so bad. I've had to use the UK government website system for my residence visa and it was a breeze. The US department of the treasury gets $22 billion to spend every year on administration.
That's $220 billion per decade. Surely they can shell out a crazy $5 million every ten years for a usable site refresh?
It crashed Chrome right after I hit "submit" on the purchase. Nice!
After logging in again and seeing $0.00 everywhere, I found a transaction list showing that a purchase request went through. Hopefully the amounts will update tomorrow!
It's now going to update at the speed of the ACH transfer from your bank, maybe as soon as tomorrow. Then you'll see two transactions: the requested date, and the date of the receipt of funds from your bank.
They told me the same thing, and then I added my driver's license number and it let me through...
... and then they sent me an email saying my account needs additional verification. They want me to fill out https://www.treasurydirect.gov/pdf/rs/acctauth.pdf - which somehow doesn't load in the browser, but works with wget - which would require me to sign it in the presence of a "certifying officer".
Yeah, jumping through all these hoops isn't worth even 10% interest on $10k.
If its the same implementation I am familiar with, its to proffer something unique to the user that they are familiar with that a phisher would likely not have, though of course, they could make a request to the provider as you as soon as you offer your username lol.
1. They store your plaintext password and then compare to_upper() of your stored password against what you enter on the virtual keyboard (which only supports uppercase letters).
2. They to_upper() your initial password, before they salt/hash, and test the salted hash against the salted hash of whatever you type on the virtual keyboard
3. Either one of the above but with an additional to_upper() on the password you enter at login so that if you do manage to type the password using your keyboard instead of the virtual keyboard it's still case insensitive.
You can only buy $10,000/year of these. Back in the day, a married couple could purchase up to $120,000 of them if you bought $60K in paper and $60k electronic. When they were paying around 7% in 1998 or so, we would max out every year. The lowered the limit because of "equity".
I was so happy to have found I bonds in the last few months.
This does beg the question - is there any other “safe, relatively liquid” option that has even close to the same yield as I Bond? Seems like traditional bank savings and short term CDs are still well below 1% everywhere.
No. There is a reason you are limited to $10k a year. I bonds are not a financial product being sold for the benefit of the seller. They are a government service being provided for the benefit of the buyer.
Kinda sound like a wanker here, but if I can only by $10k of bonds... that works out to about $500 after taxes in a year. Not a whole heck of a lot, or do they retain the 8% for however long you hold the bond? (e.g., 10 years?) Meaning at 7.2% in 10 years I'd have 20k?
No they have a rate that adjusts to match inflation. So after 10 years you will have exactly the same amount as you started with in real dollars (actually less because of taxes...)
The bonds last up to 30 years, and you can buy the yearly max every year regardless of how much you own. However, they do not have a fixed interest rate. Every 6 months, the rate is set to match inflation.
The interest rate gets changed every 6 months depending on the CPI. The $10k limit is per year - so if you hold on to those bonds you can potentially have $300k invested in total.
As the parent comment stated - this isn't meant to get anyone rich. This is the government providing a service that allows (working-class) individuals to keep a rainy-day fund relatively insulated from risk. If you're able to save more than 10k per year, you're not the primary target for this service.
One thing to keep in mind is that the I Bond rates will go way back down once inflation does. So it's great as an inflation hedge, but other assets will almost certainly out perform them in the long run.
Assuming VOO will get bailed out by US government in the event of a decline/stagnation within the timeframe of a few years, then I would go with $10k in VOO over $10k in I bonds every year due to the lower long term capital gains tax rate for VOO as opposed to paying regular income tax rates on interest income with I bonds.
Market funds are a very bad place to keep money that might be needed soon. Ibonds provide a safer place to keep funds you might need in an emergency. You should never have emergency funds in the market.
Also, assuming a government bailout will come to the rescue is a pretty risky strategy.
I bonds are also not for funds needed soon. I see some utility for them for funds that might be needed after 12 months, but before whenever one feels comfortable that public equity markets will be bailed out. They do sound like a good option for those that want to be prepared for emergencies 12 months into the future.
>Also, assuming a government bailout will come to the rescue is a pretty risky strategy.
Of course, this is just my opinion, but I feel like it is risky to not assume a government bailout. As far as I can see, the options are bailout of public markets, or revolution.
You don't pay tax on I bonds if they are directed towards educational expenses for you or your child.
Compare this with a 529, which serves a similar purpose. Then this just reduces to a stocks vs. bonds argument, but for your kid's education. Do you value safety or STONKs then?
Also, I find changing beneficiaries for an I bond is easier than a 529, in the event whatever beneficiary doesn't pursue college (a decision I understand more these days), but IANAIA (I am not an investment advisor?)
Unlike a 529 plan, the tax benefit of using I-Bonds for tuition is only available if your AGI is under a certain amount in the year you cash them in (currently $154k for a married couple). https://www.investopedia.com/ask/answers/111414/what-educati...
The same AGI phase-out applies in the year that you do the rollover.
So this doesn’t allow you to avoid the income phase-out, it just lets you time-shift the educational spending to an earlier year (in which your income may be below the threshold).
If your family income is above the threshold in every year until you need the money for tuition, then there will not be an opportunity to get the tax benefit.
From your link, emphasis mine:
> Taxpayers can bypass the income phase-outs on savings bonds by rolling them over into a 529 college savings plan before their income increases beyond the income phase-outs.
Also, I am not exactly sure what you mean by "STONKs", but if one's investment timeline is on the order of years, all the history I see shows broad market equity index funds to be pretty safe.
In theory, but not in practice. Inflation is up over 8% YoY, but short term TIPS are down over 2% - for a realized loss against inflation of over 10% on what should be a "safe" asset class:
It's a very different thing to compare a fund vs holding the actual certificate. Same with the Bond Mutual Funds vs holding a Bond.
The Funds will decline because you have to sell old Bonds at a discount to buy up the new higher interest payout bonds. But if you held on to the original bond, then you'd still get the fixed payout. You'd just miss out on the opportunity of the new higher payout bonds on the market.
Not currently. Maybe if we see interest rates rise significantly we'll see some attractive rates on 10 year treasuries? I think if the 10 year goes over 6% I'm going to start buying them.
I would just buy stocks and keep rolling LEAPs (long dated options) to cover the downside risk of different scenarios. Then you can fine tune exactly the risk you want to take and the premium you want to pay. I-Bonds are not that attractive and the rates are not great when you take into account inflation. Plus there are a million ways to get a better tax outcome with stocks, tax privileged accounts, loans, tax loss harvesting, etc.
Yeah that has a somewhat different risk profile. A series I bond risk profile is basically 0 risk. Anchors risk profile is roughly “oh my good sweet buttered Christ what are you thinking?!”
When i-bonds have a fixed rate of zero they are guaranteed to under-perform inflation since you still must pay federal income tax (not even LTCG) on their increase in nominal value.
An i-bond needs to have a fixed rate of at least 0.27% to cover the interest on the 2% target rate of inflation, assuming a 12% income tax rate. If inflation was sustained at 9% the i-bond fixed rate would need to be 1.2% to make it not lose value.
I-bond is an interestingly alternative when you'd otherwise just hold cash, but with the fixed rate of 0 it's not that exciting. Other than cash few other investments are guaranteed to lose money relative to inflation.
I would avoid buying I-bonds with a fixed rate under 0.5% and certainly under 0.2%.
... and that's entirely without getting into the argument that the government systematically underestimates inflation e.g. by CPI-U having an open-loop correction for substitution.
It's worth noting that I bonds are exempt from state income tax, and you pay federal income tax at the time you redeem the bond, not at the time you get interest, so it's federal income tax deferred. You could potentially hold onto the I bond for up to 30 years before being forced to redeem, so you could wait until you're in a lower tax bracket, which makes it better.
Indeed. But consider: except for very high income households, the LTCG tax rate is never more than 15%-- and federal income tax brackets don't go lower than 10% and even just social security payments will move people into 12%. Many ibond alternatives yield qualified dividends (=LTCG rates). For anyone with income under 41k (81k married) long term the LTCG rate is 0. A rate of 0 is wayyy better than a rate of 12% but deferred.
State taxes are a bigger difference but really just for the few states that have higher income tax rates... and even those they're only really high for high incomes.
Depends on your needs. In my case, I already own a significant amount of ibonds at the 0.5% (or higher) base rate and aren't in need of additional cash-like investments.
We should expect the dollar denominated value of non-cash-heavy investments to have its returns increase by inflation. So if someone is looking at 9% ibonds and mentally comparing it 12% equities and thinking the ibonds sound amazing-- thats the wrong analysis. Instead they should back out inflation on both sides of that comparison and be comparing slightly negative yield ibonds to 10% equities yields.
So essentially one should only own ibonds to the extent that one's portfolio needs something cashlike to improve its sharpe... and IMO one should try to load up on their ibonds when they're at a higher base rate. (How high? I dunno, but 0% is not high)
Someone considering iBonds has 10k sitting idling and wants that to either hold most of its value, or gain value. They are willing to not touch it for at least a year and also don’t want to lose more money than what you lose with the iBonds. With a volatile market like the one today, what is a safer bet? iBonds, or gambling it at the market?
I am always wary when there is a guaranteed return even if it’s a very safe investment. But given the stability of the US Govt, could someone explain who is on the “other side” that provides these returns and why?
Possibly ELI5 sorry!
The government is the "other side," and they do it as a service to consumers. Each individual can only purchase $10K per year, so it's not meant as a general purpose investment vehicle.
I had everyone in my household start shoving savings into i bonds a year ago. Now that money can be withdrawn (albeit with a small penalty). Those are now our emergency funds and will continue to keep up with costs!
Do you have to be American to purchase this? What about Canadians? This is absolutely bonkers that this exists, the GIC account I put in pays a measly 1.25%.
Update: so according to this site looks like it is possible but we will be taxed on the interest (50% capital tax!!!)
I'm still not sure that doing so before May 1 is the way to go. Jumping straight in seems better if you assume that inflation isn't going below 7.5% by November
Not available for expats, apparently. Opening an account requires a form to be signed by some sort of certification officer (not a notary) only available in the US.
I've been locked out of my treasury direct account for years now. The website directs me to call, I waited on hold for 4 hours before the call was disconnected
I must be the only one who hasn't caught the I-bonds mania. Yes 9.5% is a crazy interest rate, but it only works if you (1) have $10K lying around in a savings account (2) don't need to touch it in the next 12 months (3) need it in the short term after the 12 months are up. And ultimately you will make a few hundred dollars worth of interest (minus a 3 month interest penalty), all of which will be taxable immediately at your regular short-term rate.
Just put the $10K in VOO instead and forget about it for a few years.
I'm okay with 1, 2, 3. This is far better than anything offered by Canadian fixed income products. The reason I'm wary of equities, especially indexes is that its severely overvalued and due for a major correction (30~50% seems to be the consensus by famous bears), and that it feels like its running on fumes post 2020.
So $900 USD * 0.75 = $675 USD risk rate return after 50% capital gains tax ain't that bad. Wish wise I might be able to get back $840 CAD on a ~$12000 CAD investment.
Would be great if I could get the extra 5k limit increase by going the paper option like somebody mentioned in the comments but unsure how that plays out for Canadians.
You could but you could also hold inverse SPY tickers can't you?
I understand the risks of shorting but its not clear to me say what I stand to lose with $SPXU for instance, is it designed to lose value with time due to the underlying futures contracts?
It can be used as an emergency fund (takes some time to build up but if you do the math it’s totally worth it to take 10k you would have invested, put it in i bonds, then invest 10k from your cash savings after a year, even assuming inflation goes back down to 1-2% and stocks perform really well) or as part of a portfolio with both stocks and bonds.
Yes, but I only mentioned state tax. Are I Bonds subject to state income tax? The lack of state tax on T-bills was a great loophole for emergency fund growth a few years ago until yields dropped around the start of COVID.
The demographics driving up inflation are probably not the same ones investing into I-Bonds. Take a look at this loan delinquency rate over the course of the pandemic [1] - it's pretty clear that the American Rescue Plan (last round of stimulus passed by reconciliation) had a marked impact on subprime auto and credit card loans. That gives you a hint for where all that stimulus money ended up going instead of being spent on useful things like food or invested. Coincidentally one of the biggest drivers of CPI was used cars.
Also, I saw an assumption about financial investment being a moral positive slip in there. I've become less convinced of this recently.
At the bottom of an industrial, technological, geographic, or demographic S-curve, opportunities are plentiful to forego consumption today in order to create wealth tomorrow. Investment is useful. Rates of return are positive, incentivizing it. Cool. What happens at the top of the S-curve, though? Those opportunities dry up, relative to available capital. There's nothing inherently bad about this. Quite the opposite, it's a good thing! "Our work here is done." It's a big problem if you make your money by investing, though, and everyone at the top of the social pyramid does, so they exercise their immense political power (they're the top of the pyramid, remember) to ensure that the "growth" continues at all costs. It doesn't matter if it's artificial growth, it doesn't matter if it comes at greater expense to someone else, it doesn't matter if it causes social problems -- they keep pumping all the same because it is in their interest to do so, and they keep pumping until something bursts.
In this framing, encouraging financial investment is not an unqualified moral positive. If financial rates of return are low, I'd expect quite the opposite, with investment in financial instruments as a moral negative while investment in, say, better food or used cars would be net positives.
Morality aside, I'd also expect this dynamic to be reflected in rates of return: if rich people can satisfy all of the market demand for financial investment, the best rates of return will be in non-financialized investments, like buying a new used car to replace an increasingly expensive clunker.
This is one of the reasons certain economists recommend cash payments over benefits like SNAP for poor people. People generally have a good idea of how they could invest in themselves for an immediate improvement in their situation. Be that getting the money for a down payment on a car, house, or apartment; getting tools they need to start side business; taking time off to take a class at a community college; etc.
(a) most people in the USA live in a region without adequate mass transit and thus needs cars to do useful things like keeping a job or shopping at the grocery store.
(B) did the Wall Street journal article also talk about the effects of the chip shortage and the subsequent new car shortage that hit last summer? If not, it is willfully misleading.
(C) another hint on where all that money went is the increase in fuel costs, rent costs, and food costs. The increased demand is exacerbated by the supply chain troubles including the decrease in US oil wells provoked by Biden's war on American-sourced fossil fuels.
Fun fact - you can still get paper I Bonds if you request your tax refund be sent that way. https://www.irs.gov/refunds/using-your-income-tax-refund-to-... - this is the ONLY remaining way to get paper I bonds.