Treasury I-Bonds from Treasury Direct? Too good to be true? (bond, IRA)
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
Right now I-bonds are paying 7.12%. You have to hold them for 5 years so as not to have to pay a penalty.
The interest is compounded semi-annually. So every 6 mos, the interest earned is added to the capital, and a new interest rate is calculated based on a fixed rate and inflation. Rinse and repeat for 30 years or until you want to cash out (after 5 years, if you don't want to pay a penalty).
This seems like a good place to park some cash you don't need for five or more years, in a time of rising inflation.
Does anyone have experience with these I-bonds? If you do, what are your thoughts on them? I've never bought govt bonds before, so this is new to me. (I would buy directly through Treasury Direct.)
The fixed rate portion is at 0%, so when inflation returns to "normal" the I-Bond return will drop to much lower levels. I created the attached spreadsheet to forecast what the returns might be for 5 years if inflation drops after a little while.
If they raise the fixed rate portion, to track the Fed's increases, then these might look far better for longer.
There is a maximum or $10,000 a year for purchasing I bonds and yes the current rate is 7.12%. The new rate changes every May and November. The current 5 yr CD rate locally for me is .7%. So, on 10K I would earn $70 a year or $350 for 5 years. The ibond for 6 months would earn $356. So, in 6 months the current rate would earn me more than the total interest earned on a CD for 5 years.
There is another advantage particularly if you are over 70 and required to take RMD's from a taxable IRA. Money sitting in a CD the interest is reportable yearly, while interest earned on an ibond is tax deferred for up to 30 years. If you now need to take RMD's from your taxable IRA there is a very good chance you will meet the criteria where some of your social security will now be taxed as well. Since ibonds are tax deferred the interest earned is not included in determining how much of your social security will be taxed until you actually cash the bonds.
If you think you may need to cash an ibond it is better to break up the amount of each Ibond rather than put 10K into one bond. You might instead do 2 ibonds at 5K each. That way you don't have to cash a 10K bond when you only need 5K.
With the present inflation rate I expect ibonds which adjust every 6 months based upon the inflation rates will be a good alternative to CD's for a few years at least.
There is a maximum or $10,000 a year for purchasing I bonds and yes the current rate is 7.12%. The new rate changes every May and November. The current 5 yr CD rate locally for me is .7%. So, on 10K I would earn $70 a year or $350 for 5 years. The ibond for 6 months would earn $356. So, in 6 months the current rate would earn me more than the total interest earned on a CD for 5 years.
There is another advantage particularly if you are over 70 and required to take RMD's from a taxable IRA. Money sitting in a CD the interest is reportable yearly, while interest earned on an ibond is tax deferred for up to 30 years. If you now need to take RMD's from your taxable IRA there is a very good chance you will meet the criteria where some of your social security will now be taxed as well. Since ibonds are tax deferred the interest earned is not included in determining how much of your social security will be taxed until you actually cash the bonds.
If you think you may need to cash an ibond it is better to break up the amount of each Ibond rather than put 10K into one bond. You might instead do 2 ibonds at 5K each. That way you don't have to cash a 10K bond when you only need 5K.
With the present inflation rate I expect ibonds which adjust every 6 months based upon the inflation rates will be a good alternative to CD's for a few years at least.
You can also buy another $5,000 in paper I Bonds with your tax refund. If you are single you can buy $10,000 but marrieds get $10,000 each. You have to hold them for one year, and if you cash them in prior to 5 years you only lose two months interest.
The limit is $10,000 per person per calendar year. So if you’re married you and your spouse can each buy $10,000 worth once a year. Also, you can buy more each year with your federal income tax refund (if you are due one).
You can also buy another $5,000 in paper I Bonds with your tax refund. If you are single you can buy $10,000 but marrieds get $10,000 each. You have to hold them for one year, and if you cash them in prior to 5 years you only lose two months interest.
Being retired, I manage my estimated taxes each year to be just about $25 more than I anticipate needing. That $25 if not needed then gets applied to the taxes for the following year. So, no big refunds since I retired.
I should mention you can also buy ibonds in smaller amounts such as $1000 ibonds. That way if you should need to cash in a bond you you can do so without cashing out more money than you need.
Buying on line thru Treasury Direct is not too difficult to set up, but, adding a beneficiary or co-owner was a little confusing the first time I did it. You must have the person's SS# to set them up unless the individual is a minor.
The limit is $10,000 per person per calendar year. So if you’re married you and your spouse can each buy $10,000 worth once a year. Also, you can buy more each year with your federal income tax refund (if you are due one).
I think it's technically tied to a SSN. So I think if you have 2 kids you could do $40k/yr. Someone please correct me if I'm wrong.
Being retired, I manage my estimated taxes each year to be just about $25 more than I anticipate needing. That $25 if not needed then gets applied to the taxes for the following year. So, no big refunds since I retired.
I should mention you can also buy ibonds in smaller amounts such as $1000 ibonds. That way if you should need to cash in a bond you you can do so without cashing out more money than you need.
Buying on line thru Treasury Direct is not too difficult to set up, but, adding a beneficiary or co-owner was a little confusing the first time I did it. You must have the person's SS# to set them up unless the individual is a minor.
You can send in an additional $5,000 to IRS before the end of the year and use that to buy the I Bonds.
I think it's technically tied to a SSN. So I think if you have 2 kids you could do $40k/yr. Someone please correct me if I'm wrong.
You have to be 18 or older to open an account. So, the limit is $10,000 per adult (and an additional 5k as part of a tax return for a paper ibond) per year per adult. You can name a minor as as a second person on the ibond, but, they cannot open an account as a minor.
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
