I Bond, iBonds, i-Bonds or Series I bonds.

Top 38. Sep 8, 2003 6:51 PM

» Makena - Re: Re: Re: Re: Re: Re: Re: I Bonds in an IRA.

Did anyone actually find a bank which would act as custodian and hold I-bonds registered in an IRA? And yes, I mean I-bonds, not TIPS. I read here that it can be done, but am looking for the name of the bank that will do it, even for a fee.

-- posted by Makena

Top 39. Sep 16, 2003 5:56 AM

» Kirk - U.S. AUGUST CPI UP 2.2% OVER 12 MONTHS

.
8:32am 09/16/03 U.S. AUGUST CORE CPI UP 0.1% VS CONSENSUS 0.2%
8:32am 09/16/03 U.S. AUGUST CPI UP 2.2% OVER 12 MONTHS
8:32am 09/16/03 U.S. AUGUST CPI UP 0.3%; CONSENSUS AT 0.4%

So if I Bonds are kept at 1.1% for the base rate and they get roughly 2.2% for the inflation rate, then we'd expect to see them pay about a 3.3% annaul rate, give or take a few tenths, for the next 6 month period. This is still very good compared to what you get in money funds.

I think the "competition" for iBonds are 5 yr treasuries since you pay a penalty for selling an iBond if help less than 5 yrs, you would expect them to pay a premium over the 5 yr TBill.

Currently the 5yr TBill is paying 3.11% so making the base rate for iBonds 1.1% (the same) and paying 2.2% for inflation would give holders a premium over TBills along with inflation protection.

TIPS are currently paying
5yr 0.99%
10yr 2.18%
30yr 2.64%

-- posted by Kirk

Top 40. Oct 1, 2003 1:34 PM

» aacandy - I Bonds

What is the opinion about what the I bonds 2 interest rates are going to do on November 1?
Thanks

-- posted by aacandy

Top 41. Oct 1, 2003 4:52 PM

» Thruhiker - Re: I Bonds

In response to message posted by aacandy:

The inflation rate will definitely go down.

There has been no logical pattern for the fixed rate (although theoretically the fixed part should *never* change). However, I'm betting that the fixed rate increases slightly to partially offset the decrease in the inflation portion.

The combined rate will be lower.

If I was considering buying more (I'm not...I believe a fair fixed rate is 2%) I'd wait till the new rate comes into effect as you will have the higher fixed rate (if I'm correct) for 30 years.

-- posted by Thruhiker

Top 42. Oct 2, 2003 12:07 AM

» notchakotay - I-Bonds in IRAs

OK, repeatedly the advice is to never put I-bonds into an IRA. Maybe it would be "stupid" to do so. Or maybe it would be very smart.

I'm contrarianan, so bear with my logic on this and tell me why I'm wrong.

If one holds I-bonds in an IRA, it is true that the earnings becfederallyally and state taxable, but then the earnings are taxable anyhow -in both cases, taxability occurs only once the bonds are cashed, and it is only in the IRA that the state taxes kick in (is this correct?) so the impact in a high tax state can be significant (less so in a low tax state). The important difference, though, is that since I-bonds can be cashed anytime after being held 1 year without penalty, in an IRA that means that one can roll over the "ripe" (i.e., over 1 year old) I-bonds as desired without paying taxes (since the funds remain in the IRA) and purchase new I-bonds at the current base rate, which is quite likely to be a lot higher in the future. If one tries to do this outside an IRA, it will generate a taxable event every time the boares ar sold.

So, insofar as I can see, the only downside to buying and holding (and rolling over) I-bonds in an IRA is having to pay state taxes on the profits at the time the IRA is liquidated. The upside is that deferring that taxability allows one to continuously upgrade one's I-bonds to the highest base rate bonds whenever they become available.

Where am I wrong here?

-- posted by notchakotay

Top 43. Oct 2, 2003 2:17 PM

» Thruhiker - Re: I-Bonds in IRAs

In response to message posted by notchakotay:

To answer your question, yes, if you live in a tax free state you could *theoretically* (more on this later) do as you say. You will be giving up the option of redeeming them early without penalty. I-Bonds are already tax deferred as you know. Best to use your your IRA for other investments.

Don't necessarily agree that the base rate "is quite likely to be a lot higher in the future." The inflation component will probably be higher. One of these days the government should realize that the fixed component should *never* change. Who knows what that rate will be?

This is really a theoretical argument. Legally, only paper I-Bonds can be held in an IRA. They are planning to discontinue paper I-Bonds as soon as they politically can. I've read 2005 but I don't know if that is accurate. And as a practical manner, I'm not aware of any custodian that is willing to hold the actual paper I-Bond in your account. Would be interested if you know of one.

So to sum up. Putting your I-Bonds in an IRA is a dumb idea. But if you want to do it you can do so for maybe the next 2 or 3 years and only if you can find a custodian willing to hold the paper.

-- posted by Thruhiker

Top 44. Oct 6, 2003 10:38 AM

» radiodude - Re: Inflation-safe bonds can't hide from IRS

In response to message posted by KLR:

Step into the 25 percent tax bracket and inflation-adjusted investing turns slightly negative.

This doesn’t seem to add up. Remember, these have tax deferral.

Start with $1000, buy and hold a 4.66% I-bond for 10 years (assume the CPI-U stays at 3.56 like it is today, so we hold the rate of 4.66%),:
$1000 * (1.0466)^10 = $1577 total before taxes.

And then pay 25% of your profit in federal taxes (these are exempt from Oregon’s awful state tax):
$1577 – (577*0.25) = $1433 total amount in the piggy bank after taxes are paid.

Now, how much money will you need in 10 years to have equivalent buying power of today’s $1000 if inflation is 3.56% per year?

$1000 (1.0356)^10 = $1419

After taxes, we ended up with slightly more than your original inflation adjusted amount of $1419, so, for the 25% tax bracket, this is nothing to write home about, but it is not a negative real return like the article indicates.

…..radiodude

-- posted by radiodude

Top 45. Oct 24, 2003 6:24 AM

» mtpirate - Re: U.S. AUGUST CPI UP 2.2% OVER 12 MONTHS

In response to message posted by Kirk:

Kirk:

Thank you for the info. However, the 2.2% inflation rate you cite is not the rate the treasury will use. Instead they will use the rate from May 1 through and multiply by 2. I have 2 questions for the group:

1) Does anyone know where one can find the actual monthly CPI numbers for the past 5 months?

2) Most importantly, when I first bought Ibonds in November 2001, I remember reading what the pre-November and post November base rates were going to be prior to Oct 31. At that time, the base rate was going to be higher starting November 1 so I waited. I have not been able to find out what the fixed rate will be. Does anyone know where to find that information?

Thanks.

Scott

-- posted by mtpirate

ftp://ftp.bls.gov/pub/special.requests/c...

Top 46. Oct 24, 2003 8:08 AM

» Thruhiker - Re: Re: U.S. AUGUST CPI UP 2.2% OVER 12 MONTHS

In response to message posted by mtpirate:

I-bonds use the CPI-U which over the last 6 months have changed from 184.2 to 185.2. If my math is correct the inflation portion for the next 6 months would be 1.09%.

The fixed rate component is not disclosed in advance.

I have some I-bonds with 3.0% and 3.6% base rates; bonds with a base rate of less than 2% are not attractive to me.

-- posted by Thruhiker