By Dr. James M. Dahle, WCI Founder
I Bonds are back in the press! The last time I wrote about I Bonds (2014), I had zero interest in investing in them and neither did anyone else. That has all changed recently—mostly because the annual inflation rate soared in the back half of 2021 (and because by April 2022, it had jumped to 8.3%)—so it's a good reminder that asset classes periodically rotate in and out of favor. Let's take a look at I Bonds once more.
Who Should Consider I Bonds?
While I do not actually own any I Bonds, they can make a lot of sense for some investors. The ideal purchasers of I Bonds:
- Want to put some of their portfolio into bonds,
- Want to put some of their bond allocation into inflation-indexed bonds,
- Have a taxable investing account (i.e. cannot fit all of his or her investments into retirement accounts), and
- Are not TOO wealthy.
If any of these are not true, then I Bonds probably are not for you.
I vs EE Bonds – US Government Savings Bonds
The US government issues two types of Savings Bonds: “Series EE” and “Series I.”
What Are EE Bonds?
The EE Bonds have been issued since 1982 when they were yielding 13.05%. Unfortunately, they now yield 0.10% (and have since my original post on I Bonds in 2014). While it is hard for me to get excited about a savings account yielding 0.60%, it's six times better than the current yield on EE Bonds. EE Bonds are not indexed to inflation in any way.
What are I Bonds?
I Bonds, however, are similar to Treasury Inflation Protected Securities (TIPS) in that there are two components to the yield. One component is fixed at the time you purchase the bond. It is set for new bonds every six months. If you buy an I Bond right now, the fixed rate is 0.00%. If you bought it in 2000, you could have gotten 3.6%. The other component varies with inflation and changes with the Consumer Price Index (CPI-U) (non-seasonally adjusted, includes food and energy). It is changed every six months and then combined with the fixed rate of your particular bond in an interesting but not straightforward way.
The combined rate can be lower than the fixed rate, but never lower than zero. It changes every six months on the first day of the month you bought the bond (January 1 for bonds bought in January) and the first day of the month six months later (July 1 for bonds bought in January). The current inflation rate is a whopping 3.6%, dramatically higher than the 0.59% the first time I wrote this post back in 2014. But it has varied from 2.85% to -2.78%. Keep in mind that is a “six-month inflation rate” so the calculation to get your composite rate actually doubles that. There is one other factor in the calculation (the fixed rate multiplied by the inflation rate), but it rarely affects things much so you can essentially ignore it, at least these days.
Here is the calculation:
Composite Rate = Fixed Rate + 2 * Inflation Rate + Fixed Rate * Inflation Rate
So, on an I Bond issued in the first few months of 2022
7.20% = 0.00% + (2 * 3.60%) + (0.00% * 3.6%)
And on an I Bond bought back in 2000
10.89%= 3.60% + (2 * 3.60%) + (3.60% * 3.60%)
I'm not sure I really understand the point of that last factor since it only adds a basis point or two to the yield, but that's the formula. So, the fixed rate when you buy I Bonds is all important to their eventual return. You get to keep up with inflation (at least inflation as defined by the government), but that's it unless you buy a bond with a halfway decent fixed yield. However, inflation right now in the fourth quarter of 2021 (as measured when calculating I Bond yields) is pretty high, so the overall yield is pretty high, even without a decent fixed rate. If you can combine it with a high fixed rate, it's downright awesome!
As of May 1, 2022, the interest for an I Bond rose again to 9.62%, up significantly from the 7.20% in the previous six months. The I Bond rate will remain at 9.62% until November 1, 2022.
Now you see why there is so much interest in I Bonds right now. Who wouldn't want a very safe investment with a yield in the 7%-11% range? Note that the yield compounds semi-annually—not daily like most savings accounts, which has the effect of slightly lowering your return.
Pros and Cons of I Bonds
Benefits of Savings Bonds
There are some minor tax benefits to buying savings bonds, both EE and I. First, the income grows in a tax-deferred manner for up to 30 years. There are no distributions like with a CD, a savings account, or a typical bond. They're a little bit like “zero-coupon bonds” that way, except you don't have to pay tax on phantom income like you would with a Zero or even a TIPS in a taxable account.
When you finally do redeem the bond, the interest is taxable at your usual federal marginal tax rate but free of state or local income tax, just like all treasury bonds. However, if you use the entire proceeds (both principal and interest) to pay for qualified educational expenses, the interest is also federal income tax-free. Unless you're a doctor. Then you're probably out of luck because your income is too high to get that tax break, which is phased out completely at a 2021 modified adjusted gross income of $98,200 ($154,800 married).
You can't even just let your kids buy the bonds, because they have to be purchased by someone at least 24 years old to get the educational expense tax break. However, if for some reason you have I Bonds and you are below the income limits this year but don't expect to be later, you can redeem them now and put the money into a 529 plan, which is considered a qualified educational expense.
Additional Resource:
What Bond Fund Should You Hold
Downsides of I Bonds
The main issue with using savings bonds is that they're a pain to buy and to redeem. This is why I say you need to be wealthy enough to need a taxable account but not so wealthy that the low amounts you can invest into I Bonds are comparatively irrelevant to your portfolio size.
You used to buy “paper I Bonds” at a local bank. You just walked in the door, plopped down 50 Benjamins, and walked out the door with $5,000 in I Bonds.
As of 2012, you can't do that anymore. One of the only ways to get paper I Bonds is as part of a tax refund. You can deliberately overpay your taxes by $5,000 (per person) and then get the refund as an I Bond. If you don't want to do that, your only recourse is to buy I Bonds directly from Treasury Direct. You can purchase E Bonds, TIPS, and other treasuries this way too if you like. Personally, I find it well worth the 10-20 basis points that a well-run, passive mutual fund or ETF will charge to take the hassle of buying and selling individual bonds away from me.
Unfortunately, there are no savings bond mutual funds, so if you want them, you have to buy them individually. So you open an account at Treasury Direct and buy up to $10,000 in I Bonds per year per person. You can actually open a bunch of trusts if you want and each of them can buy $10,000 of I Bonds each year, but that seems like more hassle than it is worth to me. If you actually wanted $200,000 of your portfolio in I Bonds, it might take you a decade or more to get there. If you have a $2 million portfolio and want 10% of it in inflation-indexed bonds ($200,000), I Bonds just aren't going to do it for you.
You can also redeem your electronic I Bonds at Treasury Direct (remember to do so before they hit 30 years old, since they stop earning interest then). You may also redeem your paper I Bonds at many local banks. However, you cannot redeem bonds in less than one year, and if you redeem them in less than five years, you lose three months worth of interest.
Remember to always buy savings bonds at the end of the month and to sell them at the beginning of the month to maximize your returns. (You get credit for owning them for the whole month, even if you only own them for a day.)
TIPS vs I Bonds
The natural question an educated reader will have is “What about TIPS?” TIPS work a little bit differently than I Bonds, but the same basic principles apply. There is a fixed portion and an inflation-linked portion. Both are linked to CPI-U. Both are state and local income tax-free. TIPS do not have the tax-deferral feature of interest, and they can also generate phantom income—on which you owe real taxes, so they're generally best held in a tax-protected account.
It is relatively easy to compare TIPS to I Bonds to determine which is the better deal. Since both are indexed to CPI-U, you just have to look at the fixed rates. Since you can hold I Bonds for up to 30 years, you can just compare a 30-year TIPS to an I Bond. As of this writing, a 30-year TIPS yields -0.27% real, and an I Bond yields 0.00% real. That was an easy decision, although the first time I wrote this article the comparison favored TIPS, not I Bonds!
I bonds look even better right now when compared to a 5-year TIPS (-1.66% real) or a 7-year TIPS (-1.26% real). You can also compare them to commonly held TIPS mutual funds (which tend to hold shorter-term TIPS), and they look great.
TIPS are easier to buy in any amount and you can hold them within a mutual fund or ETF. However, if rates go up, you can redeem your old I Bonds and buy new ones, whereas you'll take a hit on the principal of the TIPS. (Of course, if rates fall, you get a boost on the principal of the TIPS.) Note that if you decide to redeem your old I Bonds and buy new ones, you're still limited to just $10,000 per person per year (plus the $5,000 from your tax return).
Are I Bonds A Good Investment?
There are really four ways people use I Bonds. When today's low fixed rates are combined with a low inflation rate, none of them are particularly wonderful. But that's not the case right now.
#1 Educational Savings Plan
The first is as an educational savings plan. This is kind of silly, however, since 529s give you the exact same federal tax treatment, plus a possible break on your state taxes. If you have already maxed out your 529 contributions per year ($15,000 per spouse, per child), it is unlikely that you have an income low enough that you'll get the educational tax break on your I Bonds. So that's not a very good reason to buy I Bonds.
#2 Emergency Fund
The second use is as an emergency fund. Instead of earning 0.6% at Ally Bank or buying some CDs yielding 1%-2%, the investor figures, “Hey, why not put some of my emergency fund into I Bonds?” It gives you some inflation protection and the possibility of higher yields. The downsides are that you can only buy a limited amount each year (and can't buy back the ones you sell), and you can't redeem them for at least a year. If you redeem them in less than five years, you forfeit three months of interest. Plus, they're a pain to buy and redeem, compared to a simpler solution like a savings account. Besides, the point of an emergency fund isn't to get a maximum return on that money. Not a great reason to buy I Bonds, but if you have some you bought a few years ago, sure, feel free to use them as part of your emergency fund.
#3 Expand Your Tax-Protected Space
The third use is to “expand your tax-protected space.” Many investors have a large taxable account in comparison to their tax-protected accounts. Since I Bonds grow with the interest tax-deferred, some investors figure that owning them is a lot like having more tax-protected space. This is a little bit silly. You can always expand your tax-protected space by using a non-deductible IRA, making after-tax (not Roth) contributions to a 401(k), or buying a variable annuity. Each of those can then be used to buy asset classes that are a pain to hold in a taxable account, like REITs and TIPS. But don't think you're getting some huge benefit for doing so, since just like buying I Bonds, you get no upfront tax break for contributing to them and your withdrawals are fully taxable. These types of “tax-protected space” are very much inferior to a 401(k) or Roth IRA and, in many situations, inferior to a simple taxable account. You just get tax-deferred growth, which is a pretty limited benefit by itself.
#4 Inflation-Indexed Bond Portion of Portfolio
The fourth use is as part of the inflation-indexed bond portion of your portfolio. As I see it, this is really the only good reason for most doctors to bother with I Bonds. Given today's low yields on bonds (and thus low expected returns), it is fine to hold some or even all of your bonds in taxable. If you wish to own inflation-protected bonds, it therefore makes sense to buy some I Bonds in that taxable account. There is still the issue that you can't buy very many of them, but that's no reason they can't at least be part of the solution. You can buy as many I Bonds as they'll sell you and make up the rest of that portion of your asset allocation with TIPS.
Overall, Series I Bonds can make up a valuable portion of your fixed-income asset allocation. But don't feel like you missed out on a great deal any time recently. It has been 12 years since they had a fixed rate of at least 1% and 19 years since they had a fixed rate of at least 2%. But if you ever see them going for 2%-4% again, back up the truck. Those who bought in 2000 and still own them are loving the current yields!
What do you think? Do you own I Bonds? Does the recent rise in inflation make I Bonds a good investment? Comment below!
[This updated post was originally published in 2014.]
Don’t dismiss EE bonds so quickly. If you hold them for 20 years, they double in value, a return of just over 3.5% annually. That might look pretty good if we’re in for a Japan-like 20 years of low interest rates. I wouldn’t bet the farm on it, but it may not be a bad hedge.
Good point. That’s better than the 20 year guaranteed returns for whole life. 🙂
I see the rate on treasury direct as 0.1% today. I guess they do guarantee a minimum doubling in 20 years though don’t they, even though the current rate is 0.10%. If you hold it less than 20 years, you don’t get the 3.5%, you get the 0.1%.
Yeah, it’s basically a late withdrawal penalty instead of the more common early withdrawal penalty.
I haven’t got to the point where I’d like to have more than $20,000/year in I-bonds, most of our savings is tax deferred. But, if I did, I’d seriously consider EE-bonds.
Thanks for the great blog! I think I found you shortly after you started. I’m not a doc, but my wife is. She’s too busy and not that interested in this stuff, she just wants to retire in 15-20 years. I like doing this, so I’m trying to learn and get us there. I think we’ve got a pretty good start and your blog helps quite a bit.
I have a hard time getting excited about an investment that I have to hold for 20 years to earn 3-4% on. I hold a few bonds in my portfolio, but I hope they’ll be earning more than 3% a year at some point in the next 20, and I can cash out of them at anytime.
I have filed up tax protected space and am saving in taxable account. I have been putting stocks/REIT in tax protected space due to current environment. Trying to determine which bonds to put in taxable account. Instead of TBI and TIPS. Would you use intermediate grade muni bonds instead of TBI ( I am in a high tax bracket). For a tips equivalent would you use I bonds (granted I could only get a limited amount) short term muni bonds or limited term munis. At least 20 years to retirement.
Thanks.
I think you’re thinking the right way. Putting munis + I bonds in taxable is wise. Alternatively, you could put a few tax-efficient stock funds (TSM, TISM) in there and put some TIPS into the tax-protected accounts. Given current interest rates, tax location matters much less than it used to.
Hi,
I bought ibonds instead of muni as the interest rate of ibonds was 1.94% (0% fixed), that was somewhat same in comparision to after tax return of intermediate muni, but there was no chance of loosing money with ibonds and more creditworthy compared muni.
so bought ibonds. does that reasoning sound good? should i prefer muni over ibonds for next year ?
Thanks.
I think your reasoning is fine. I just have a hard time getting excited about anything paying less than 2%.
Neat comparison of I Bonds vs TIPS. What was the TIPS rate in 2000 when I Bonds were bringing in 4.80% ? Did I Bonds “win” then?
Grammar police (I think you are missing a word? Confusing sentence.): “You can E Bonds, TIPS and other treasuries this way too if you like, although I find it well worth the 10-20 basis points a well run passive mutual fund or ETF charges to take the hassle of buying and selling individual bonds away from me.”
TIPS peaked at around 4%. Technically, I think TIPS won anyway as rates fell over the next few years giving the TIPS a boost that I bonds don’t get from falling rates.
Yes, there should be a “buy” in there somewhere.
“The third use is to “expand your tax-protected space.” Many investors have a large taxable account in comparison to their tax-protected accounts. Since I Bonds grow with the interest tax-deferred, some investors figure that owning them is a lot like having more tax-protected space. This is a little bit silly. You can always expand your tax-protected space by using a non-deductible IRA, making after-tax (not Roth) contributions to a 401K, or buying a variable annuity. Each of those can then be used to buy asset classes that are a pain to hold in a taxable account, like REITs and TIPS. But don’t think you’re getting some huge benefit for doing so, since just like buying I Bonds you get no up-front tax break for contributing to them and your withdrawals are fully taxable. These types of “tax-protected space” are very much inferior to a 401K or Roth IRA, and in many situations, inferior to a simple taxable account. You just get tax-deferred growth, which is a pretty limited benefit by itself.”
Say you’re in a high marginal bracket, both for federal and for state income taxes. You’re already maxing out your 401k, have no ability to make after-tax contributions to a 401k, and no interest in buying a variable annuity (too complex). I Bonds give tax-deferred growth and no state and local taxes upon withdrawal. Aren’t they then superior to a taxable account? Easier than holding TIPS in taxable, because you don’t have to pay taxes on phantom income, easier than holding STRIPS in taxable for the same reason. Perhaps equivalent to holding simple Treasuries in taxable, but with inflation protection.
If you want inflation protected bonds and have to hold them in taxable, then sure, I bonds are great. Hard to get very excited about them at current yields though.
Anyone more interested in I-bonds in the zero-interest landscape of 2020?
Most bond yields are next to nothing, some are negative.
High-yield savings accounts are at best 0.6-0.7%.
TIPS yields can be negative, and were at the last auction.
I-bonds cannot be negative. Yield at the moment is 1.06%. Yield starting Nov 1 will be 1.68% (guaranteed for 6 months).
No one is going to get super rich, but is it a better place to park money that you don’t want to risk in the more volatile equities market, and at least not lose money on inflation?
caveats:
–you can’t buy more than $10K per person per yield (times each family member)
–you can’t sell before a year (well, 11 months + one day if you buy at the end of the month), so the real comparison is to one-year-CD rates, which are at best 0.7-.8%
–if you sell before 5 years, you lose 3 months interest, so your yield would be a little lower than 1.68%, depending on timing.
–when rates do eventually recover, they won’t be a good deal, but that’s likely years away from happening
Yep! I’ve been maxing my + spouse’s contributions to I and EE Bonds for the last 2 years, now they’re looking great. 😉
You’re right, they are now more attractive. But they’re so hard to buy in any significant amount. I mean, imagine you’re starting with a $1M portfolio and decide to add i-Bonds as 10% of your portfolio. That’s $100K and rising. Yet you can only buy what, $20K a year? And that’s only by overpaying your taxes and taking some of the refund as savings bonds. Otherwise it’s $10K. Or just $5K if you’re not married. Hard to build out a big portfolio with those kinds of restrictions.
I would argue that of people who have any money in high yield savings accounts, only very, very highly paid people should use the hassle of buying i bonds as a reason not to buy them .
It takes about 30 minutes max (and that’s if you are very slow ) to purchase them and for every 10k in i bonds you currently make about $720 per year instead of $50 per year from high yield savings for an hourly earning rate of $1360 ($680 difference for 30 min work). Much better than probably nearly any physician. Just another way to think about it. Easy money .
It took less than that to do it in two accounts for two years. But it is an extra account (or two) to keep track of.
It would be faster if they actually allowed you to type in your password instead of using the on screen keyboard.
That is definitely very annoying. Also, I really don’t like not being able to have the account link up to mint, where I try to track all of my accounts
We are doing $10K a year in I bonds and in EE Bonds each, my spouse and I, plus $5k via refund. $45k a year is a big portion of what we are saving/investing per year outside of 401k/IRA maxouts.
Maybe the limit is higher than I thought. I thought it was $5K directly and $5K via refund each. Is it $10K directly? Let me look it up.
https://www.treasurydirect.gov/indiv/research/articles/res_invest_articles_purchaselimits_0406.htm#:~:text=Paper%20Series%20I%20savings%20bonds,%245%2C000
Yup, looks like you’re right. $10K/year. I guess the $5K limit is per return. So $5K if you do MFJ, $10K if you do MFS I guess.
Kind of weird that people are finding EE bonds attractive again. Strange world we live in.
Do you need a saperate account for each of your family members?
I believe so.
With the May 2021 I-bond rate now being 3.54%, if a person hypothetically wanted to invest $10K in an inflation-indexed bond portion of their portfolio, would you see I-bonds as a better current plan than TIPS? And what if someone had access to the TSP G-fund as well . . . I often wonder if that is at least as good a solution as TIPS or I-bonds. Thanks, Jim.
They’re all slightly different so you’re comparing apples to oranges. For example, annual contribution limits on I bonds are too low to be practical for many high earners. But 3.54% seems pretty good to me if it works for you, especially if you want to use your tax-advantaged “space” on something else). The G fund is better in some ways, worse in others. I own both TIPS and the G fund, but no I Bonds. Nothing against them though other than the contribution limits.
I am thinking to to put a portion of our house fund (time frame 2 years) into Series I bonds instead of its current Marcus savings plan of .55 percent. Current first 6 month yield is 7.12 percent. https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ibuy.htm#interest Is there something I am missing why not to do this? Other than “hassle”
I think it’s a great idea. Only two negatives I can think of:
– You are limited to purchasing the annual I-bond limit which might not be high enough for your entire house fund, but can certainly serve as a portion of it.
– You’d forego one quarter’s worth of interest if you cash out the bonds before holding them 5 years.
Yea, the downside is the lost quarter of interest. Should still be more than enough to justify the hassle.
If you don’t already have an account the “hassle” may not be trivial. TreasuryDirect has some behind-the-scenes algorithm to verify your personal info. If it fails, as it did in my case, you don’t get to try again, your account is locked. They require that you print out a form and go sign it at a bricks-and-mortal bank in the presence of a loan officer certified to provide a Medallion Guarantee, then mail the stamped form in via snail mail to Minnesota, then wait for them to process it, and only then is your account unlocked. No big deal in the end, but a far cry from the electronic process of opening an account that it should be.
Even with the lost quarter of interest you’re way ahead of any other fixed income option.
The other major downside is that the first 12 months are a true lockup. You can’t get your money under any circumstances, I don’t think. So make sure it’s not short-term emergency cash.
I’m always trying to assess where the TSP G-fund fits into the pecking order in the spectrum of TIPS, I-bonds, and G-fund. Today’s current rates put I-bonds ahead of TIPS and G-fund, although I wonder if I’d be better off putting my extra dollars into the G-fund instead if the plan is to buy and hold. I guess it’s impossible to predict without the functional crystal ball you’ve mentioned before.
G fund is like a MMF on steroids. MMFs suck right now and G fund isn’t much better. It’s not indexed to inflation, it’s just protected from the loss of capital due to the 4 day duration.
Thank you for the great post!
I have no problem with bonds, except they are a pain to redeem.
Both my parents (and my husband’s parents) had stashes of bonds (not organized at all) with varying series, amounts, titles and beneficiaries/no beneficiaries. It is usually up to an adult child to sift thru this mess which can be very frustrating and time consuming. Bottom Line: Check with your elderly parents and locate the bonds. It is easier to cash while they are still alive. They can relate with going to a brick and mortar bank to redeem.
Thank you, Jim, for a detailed and helpful post.
A few years ago, preparing for my somewhat early retirement, I bought TIPS from Treasury Direct where I still hold them. Honestly, I don’t understand them, how they work, or even the taxes I’m paying on them every year, as they are reported as 1099 INT (easy to understand) AND 1099 OID (unclear what this is). You mentioned having to pay taxes on “phantom” interest. Could you explain how that works? Or more generally, could you expand on TIPS, when held as such, not through a fund? Thank you in advance.
That might be a good idea for a post. I think I’m going to eventually have TIPS in taxable so I’ll get to enjoy those OIDs too. I would receive 1099 OIDs (Original Issue Discounts) for my peer to peer loans years ago so I’m somewhat familiar with them.
Phantom interest is interest you get paid when you cash out the TIPS but that is taxed as it goes along.
Thanks for what you all do.
Several years ago I converted (sent in to treasury direct) my paper EE bonds. I had over 100 individual yet to mature bonds when I did that. I was essentially forced to do that because all of the banks in my rural town stopped cashing EE bonds. I am now down to about 72 EE bonds at Treasury Direct. Every month I cash out the 2 bonds that mature. The money easily gets transferred to my bank from Treasury Direct. Lately I have started buying I bonds from Treasury Direct. Just as easily as I cash the EE bonds, I buy the I bonds. I find it just as easy to do this as to transfer money from my bank to one of my brokers. My plan in doing this is to have I bonds replace some of my emergency fund. I know it is going to take time with a $10000 annual purchase limit. We might even start an account for my wife in the near future.
Agree, I have only started buying I bonds recently from Treasury Direct (no paper bonds) but the process has been painless and relatively quick, similar to moving money between any other accounts.
I buy them for inflation protection. I want to know now that my 12 year old daughter will have $1000 worth of todays purchasing power when she cashes a thousand dollar I bond 5 years or so from now. You could look at it as an educational support fund if she goes that route. My goal is for her not to start adult life with a bunch of consumer debt.
Bonds that protect against inflation are genius ways for people to get good returns in a safer way than the stock market.
I should probably look into adding bonds into my portfolio at one point…
Finally got around to making an account and getting 10K of these for the year. Thanks for the nudge! super easy process with auto ACH setup with my bank.
I find the idea that you can get savings bonds as refunds using any IRS tax return form, including simplified tax refund methods, is very interesting.
In addition, it is a low risk investment.
This post clarified many doubts I had, especially the differences between the two bonds
Thanks for the information, very valuable.
Where I really missed out was not investing in the second half of 2018 and 1st half of 2019, where with 2 accounts (you and spouse) you could have gotten $40k that would now be earning 7.64% for the next 6 months. That is something that really builds up over just keeping $40k in a savings account year in and year out.
The commitment is you need to build this up over time like most savings accounts, but had you started in 2014, you now could have over $150k earning 7.64% for the next 6 months, and possibly going higher in the future, but as a minimum keeping up with inflation. TIPS won’t do that for you because when interest rates go up the TIPS value goes down.
Don’t forget that the contribution limit is not 10K if you have a family. If you have a spouse/partner you trust, your limit is $20K + $10K for every child you have (under separate account numbers, but easy to do). Eg for a family of 4 you can put in $40K a year.
Act now and you can get $80K in by end of January…..
And the interest on the kids’ accounts probably won’t be taxable if they’re young and not earning other income.
You can easily establish linked minor accounts of reach of your kids and are permitted to buy $10,000 per kid. This is one of those times that having a large family really pays off. My emergency fund is stored in I bonds.
Great post! My daughter did some child modeling when I was in residency in the early aughts and she made a few thousand dollars. I put her earnings in i bonds. She is now in engineering school. I will probably have her cash them out her junior year as she will be in a low tax bracket. Composite interest was 5% last I checked a couple of years ago… Undoubtedly it has gone up.
Too late for her but for others with kids with legitimate earned income, you might consider a Roth with equities instead of bonds. They’ll never pay taxes on it (since it’s earned at a time when their total income is below the limit) and the time horizon means you don’t need to be conservative. The S&P, for instance, is up over 300% since 2005.
I Bonds can be gifted. So say you’re in a phased-out, high-tax bracket and you gift I Bonds to a minor, and then years later this minor uses the gifted I Bonds’ entire proceeds (both principal and interest) for qualifying educational expenses, does such minor have to pay federal income taxes on the interest because you bought the I Bonds for them?
No.
Thank you for the insight!
It would be fully taxable to the child. The qualifying educational expense portion is ONLY for the parent, and a gift to the child counts against their limit. The child cannot spend their I bonds for education – they will be taxed.
Another caveat — say the plan all along is to fast-FIRE and by the time kid(s) is nearing college to cut back practice and reduce both income and expenses below the 150K income limit for married-filing jointly (and likely higher several years down the line) that *would* allow the use of I-bonds for qualified educational expenses.
I think this would provide more room and mental sanity to use 529 plans to be invested more aggresively for longer, rather than a gentle glide to higher bond:stock allocation and potentially have a broader, relatively easy to tap pool for immediate educationally-related expenses and instead to push to achieve the max possible limit in the 529 plan via traditional state-tax deductible contribution rather than super-funding a 529, thus create another road to the “multi-generational” 529 plan as put forward by Kitces blog.
Thoughts? WCI or anyone else? As people push off having kids later & later to their mid-30s or post-residency and people switch careers or become disenchanted with the practice of medicine this becomes a more likely road plan that smooths out the bumps in the asset allocation algorithm of the educational-designated funds.
What happens if you end up with more income than you expect?
At any rate, I invest my 529s aggressively, even for my
What happens if you end up with more income than you expect?
At any rate, I invest my 529s aggressively, even for my 17 year old.
https://www.whitecoatinvestor.com/3-reasons-why-you-can-take-more-risk-with-a-529/
I don’t have much interest in bonds in taxable, but have a question regarding TIPS.
If the real yield on the VG TIPS fund is -1.5%, and the yield on the inter-term treasury fund is 1%, does that mean the expected inflation is 2.5% over the duration of the fund? (let’s assume the duration matches, even though they actually don’t comparing the 2 VG funds)
So if inflation is actually over 2.5%, I would be better of in TIPS?
If inflation is 2.5%, I would break even?
If there is deflation (market crash), better off in nominals?
My bond allocation is 20% (15% ITT; 5% LTT), used as emergency money/rebalancing money basically. Probably won’t retire for a decade. Struggling to decide whether to move some of those funds to TIPS of similar duration.
Yes, that’s the way it works in theory.
As a young attending, I found purchasing I bonds now an attractive alternative to having the equivalent cash in a savings account as an emergency fund in this inflationary climate. I may lose out if I lose my job in the next year and have to sell stocks to make up the deficit. I felt that scenario was unlikely enough that it made sense to take the 7% I bond yield vs the 0.6% in savings.