I Bond, iBonds, i-Bonds or Series I bonds.
- pzoo
- pjstack
- pzoo
- Thruhiker
- Lightningbolt
- KLR
- Thruhiker
- Lightningbolt
- KLR
- sammy2
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» pjstack - Re: Re: I Bonds in an IRA.
In response to message posted by pzoo:Thanks for answering.
If I understand you correctly this is not a new contribution which could be tax deductible if going to a traditional IRA, but money you now have in an IRA that you want to move to a new/different asset mix.
I Bonds are already tax deferred (as I'm sure you are tired of hearing by now), so they already have all of the advantages of an IRA. Actually, they have a couple of additional advantages:(1) there is no mandatory withdrawal date as with a traditional IRA, and (2) the interest is exempt from state taxes.
I'm guessing that you don't have any spare new money right now to go and buy I Bonds and you don't want to (and probably shouldn't) withdraw money from your IRA to make the purchase. That's why you are trying to see if you can transfer existing money in your IRA into I Bonds.
I don't think you can do it, but since I'm not positive about that, I'll shut up now and see if a bond expert surfaces to explain.
Phil S.
-- posted by pjstack
» pzoo - Re: Re: Re: I Bonds in an IRA.
In response to message posted by pjstack:
I appreciate your responses and you summarized the situation accurately.
I'm getting the impression that I can't do it, but the banks I have talked to haven't been able to give me an definite answer. The banks I have talked to barely seem to know I-bonds exist.
-- posted by pzoo
» Thruhiker - Re: Re: Re: Re: I Bonds in an IRA.
In response to message posted by pzoo:The issue of I-Bonds in an IRA is more complex than it needs to be; here is an overview of what you need to know:
You can have paper I-Bonds in your IRA account if your bank or broker will agree to hold the paper I-Bond in your IRA account. You cannot set up an electronic Treasury Direct account for an IRA.
The I-Bonds need to be registered in a specific manner showing the name of the IRA trustee, your name as owner, and the date of the IRA agreement.
The way the I-Bonds must be registered limit them to new purchases only. You could not transfer in I-Bonds which you previously held outside of an IRA.
The important thing to keep in mind is that I-Bonds are perfect for holding outside of an IRA. They are already tax deferred and you can cash them in before age 59 without paying the 10% penalty that would levied against those in an IRA.
TIPS would be a perfect investment (assuming you are looking for an inflation protected bond) inside an IRA.
-- posted by Thruhiker
» Lightningbolt - Re: Re: Re: Re: Re: I Bonds in an IRA.
In response to message posted by Thruhiker:I think thruhiker has a method that I have been looking for to purchase IBonds with existing IRA funds inside the IRA. Need to find a bank that understands this method and will do it. However, there appears to be some confusion regarding tax deferral of IBonds. All of the messages suggest that these are tax deferred. My information indicates that the interest and inflation growth are taxable income annually, even though one has not cashed the bonds. This is the whole value of purchasing them within an IRA.
Who can quote the rules on this?
-- posted by Lightningbolt
» KLR - Re: Re: Re: Re: Re: Re: I Bonds in an IRA.
In response to message posted by Lightningbolt:.
I think you may be confusing IBonds with TIPS.
IBonds are tax-deferred and therefore there is no reason to buy them in an IRA account, even if you could. An IBond pays fixed rate of return plus a semiannual inflation rate based on CPI-U, added monthly and paid when the bond is cashed.
If fact, unless they were held in a Roth, you would be converting the entire IBond investment into taxable income upon withdrawal from the traditional IRA.
TIPS, on the other hand, pay a fixed rate of interest. But this fixed rate of interest is applied not to the par amount of the security, but to the inflation-adjusted principal.
So, if inflation occurs throughout the life of your security, every interest payment will be greater than the previous one. On the other hand, in the rather unusual event of deflation, your interest payments will decrease.
Like other Treasury notes and bonds, TIPS are exempt from state and local income taxes, and subject to federal income tax.
As for federal taxes, here's one other matter to consider: In any year when the principal of your TIPS grows, that gain is considered reportable income for that year even though you won't receive your inflation-adjusted principal until the security matures.
So dear friend, that's why you want to put TIPS in an IRA, but not I-Bonds.
https://www.treasurydirect.gov/rs/Storefront.htm
-- posted by KLR
» Thruhiker - Re: Re: Re: Re: Re: Re: I Bonds in an IRA.
In response to message posted by Lightningbolt:Lightningbolt; you have gotten I-Bonds and TIPS confused. TIPS are a perfect fit within an IRA because the "phantom" income is taxed even though no cash has been received by the holder.
One quick thing I should have mentioned earlier is that I-Bonds CAN be purchased in an IRA (although it is a lousy idea to do so) HOWEVER you may/will have a problem finding a custodian to be willing to hold the paper bond.
-- posted by Thruhiker
» Lightningbolt - Re: Re: Re: Re: Re: Re: Re: I Bonds in an IRA.
In response to message posted by KLR:Thanks. I appreciate the education. Now I can make some educated decisions.
-- posted by Lightningbolt
» KLR - Inflation-safe bonds can't hide from IRS
.Inflation-safe bonds can't hide from IRS
08:37 PM CDT on Monday, September 1, 2003
By SCOTT BURNS / The Dallas Morning News
The temptation is to think of inflation-adjusted bonds – like I Savings Bonds – as a form of magic. The offer certainly glimmers. Current I Savings Bonds offer a total return of 4.66 percent. In a yield-starved world, that's enough to crush most competition.
The return is based on a fixed return of 1.1 percent plus an adjustment for inflation, currently annualized at 3.54 percent.
Unfortunately, the return is pretax and the same government that believes we should pay taxes on inflation gains elsewhere wants us to pay taxes on inflation here as well – so the full 4.66 percent return on I Savings bonds is taxed.
TIPS (Treasury inflation protected securities) receive similar tax treatment.
One kind thought here is that we should be grateful for tax consistency. We should appreciate its uniqueness – after all, the abomination that currently poses as our tax code provides all of us with no consistency beyond the certainty of future change.
What we need to do is understand what taxes can do to inflation-protected returns.
If you are in the 15 percent tax bracket and own I Savings Bonds, our government will claim 0.7 percentage points of your 1.1 percentage point real return for taxes, leaving you with a net real return of 0.4 percent. This is what the vast majority of people who buy these securities would receive.
New tax law
Remember, the new tax law also increases the size of the 15 percent tax bracket for couples to twice that of the 15 percent bracket for singles, or $56,800. Add $6,100 for two personal exemptions and $9,500 for the standard deduction, and your adjusted gross income will have to exceed $72,400 before you're in the 25 percent bracket. (The comparable figure for single returns is $36,200.)
Step into the 25 percent tax bracket and inflation-adjusted investing turns slightly negative. Subtract 1.16 percentage points in taxes (.25 x 4.66) from your real return of 1.1 percentage points and your after-tax, after-inflation return is minus 0.06 percent. Not much to crow about.
Higher tax brackets
Needless to say, those in higher tax brackets will suffer more. The net real return for an investor in the 35 percent tax bracket is a purchasing-power loss of 0.53 percentage points.
The real problem for investors in all tax brackets, however, is that your after-tax return will shrink dramatically if the rate of inflation increases.
Suppose, for instance, you bought an I Savings bond today and inflation over the next 10 years equaled the 8.1 percent rate that prevailed from 1971 to 1980. Then your total return would be 9.2 percent (1.1+8.1).
But you would lose 1.38 percent (0.15x 9.2) to federal income taxes, netting you a purchasing power loss of 0.28 percentage points a year. Investors in the 25 percent tax bracket would lose 1.2 percent a year of purchasing power.
This isn't unique to inflation-adjusted bonds, of course. Traditional fixed-income obligations of all kinds suffer the same fate – the greater your need for the return of your money (not the return on your money), the greater the odds your investment will lose purchasing power.
Does this mean we should avoid I Savings Bonds even though they are superior to virtually any secure obligation in the fixed-income world?
No.
Just remember the caveat: Taxes matter.
Can we do better?
Some can. The most powerful fixed-income investment you can make is to eliminate virtually any debt you have, including most home mortgages.
That will keep most people busy a while.
-- posted by KLR
» sammy2 - Merchant fee
In response to message posted by Kirk:Am I correct that the so called credit card merchant fee is paid by the US Treasury & not the I-Bond buyer? Reason I ask is that I believe that folks who previously paid income taxes with a card had to cover the Master Card fee usually paid by the merchant. Thanks
-- posted by sammy2
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