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General => Economy & Finance => Topic started by: ChiKid24 on October 13, 2021, 10:06:02 AM

Title: I-Bonds...a great place for idle cash
Post by: ChiKid24 on October 13, 2021, 10:06:02 AM
Earlier this year I was made aware of a great place to store a portion of my unneeded cash. I-Bonds. If you haven't heard or looked into them, I highly recommend doing a little research. This "Manifesto" would be a good read: https://retirementincomejournal.com/article/how-to-stop-worrying-and-love-i-bonds/?pdf=13017

Here's my overall summary
1) I-Bonds are US government securities that pay an interest rate comprised of a fixed component (set when purchased) and a variable component (fluctuates every 6 months based on inflation for as long as you hold them)

2) Current I-Bonds are paying 3.54% (0% fixed + 3.54% inflation component) and if you purchase them today, you will get that rate for the next six months. After six months, you will get a new rate for six months based on the latest inflation readings. This is expected to be 7.12% starting in November. You rate will continue to adjust every six months based on inflation as long as you hold them.

3) I-Bonds have some great tax advantages in that you do not pay any state income tax on the interest (particular good in a high state tax like California) and Federal income tax is deferred until you redeem them or they mature (20 years). You can potentially also avoid Federal income tax on the interest if you use the bonds to pay for qualified education expenses (subject to income caps)

4) You are limited to maximum of $10,000 in annual purchases per taxpayer, though you can also purchase $10,000 through a trust and can add an additional $5,000 if you overpay your Federal Income tax and choose to receive your refund in the form of I-Bonds. So a married couple could potentially put away $35,000 a year ($10k for each spouse, $10k for a trust, $5k for tax refund) into I-Bonds.

5) All I-Bond purchases must be made and held at Treasury Direct. There are a bunch of complaints about this website and user interface. I admit it's clunky, but manageable with some patience (never hit the back button on your browser lol).

6) Some other negatives is there is a minimum 1-year holding period. So once you purchase, the money is illiquid for one full year. In addition, if you redeem before five years, you will forfeit three months of interest.

Overall I'd say this is a great place to stash cash, especially when CDs and High Yield savings accounts are paying close to nothing. 3.54% interest on government bonds with tax advantages, ramping up to 7.12% next month is very attractive. Put in the added bonus that it's inflation protection and this is a no brainer for part of your emergency fund, if you are one to believe in that concept.

Hope that is helpful!

Title: Re: I-Bonds...a great place for idle cash
Post by: fatduck on October 13, 2021, 10:22:41 AM
The 1 year lockup (and 5 year "soft" lockup) is the real downside for me personally. For "emergency fund" money I want it to be liquid. And for money that I don't need to access in the next year or so, I'd rather have in equities rather than bonds that earn 0% real return.
Title: Re: I-Bonds...a great place for idle cash
Post by: CalBears96 on October 13, 2021, 11:54:15 AM
The 1 year lockup (and 5 year "soft" lockup) is the real downside for me personally. For "emergency fund" money I want it to be liquid. And for money that I don't need to access in the next year or so, I'd rather have in equities rather than bonds that earn 0% real return.

I completely agree. Any cash that isn't needed for emergency use is going to the stock market.  ;D
Title: Re: I-Bonds...a great place for idle cash
Post by: ChiKid24 on October 13, 2021, 11:57:59 AM
The 1 year lockup (and 5 year "soft" lockup) is the real downside for me personally. For "emergency fund" money I want it to be liquid. And for money that I don't need to access in the next year or so, I'd rather have in equities rather than bonds that earn 0% real return.

I completely agree. Any cash that isn't needed for emergency use is going to the stock market.  ;D

So does that mean both you guys hold 100% equities in your portfolio? I guess that's a strategy, but it's not without risk. Many people (most?) keep a portion of their long-term portfolio in bonds/fixed income/cash, likely generating less of a return than I Bonds. In those instances, the 1 year lockup isn't an issue. Just move a portion of that allocation to I Bonds. Even aside from that, my emergency fund is more than enough to cover a 1 year lockup of $10k.

For the 5 year soft lockup, the penalty is only three months of interest. So at today's rate of 3.54%, you would be at 2.655% after the penalty. Still well above any HY Savings or CD rates. When the rate shifts to 7.12% next month you are at 5.34% after the penalty. Getting a US Govt backed virtually risk-free return that high, which is CA tax exempt and Federal tax deferred is an extremely attractive proposition in today's otherwise low interest rate environment.
Title: Re: I-Bonds...a great place for idle cash
Post by: CalBears96 on October 13, 2021, 12:18:46 PM
So does that mean both you guys hold 100% equities in your portfolio? I guess that's a strategy, but it's not without risk.

I am. And I'm aware that the stock market isn't without risk, but it's a risk I can tolerate. I'm leaving $150k in savings account for emergency fund, so I can weather a downturn in my stock portfolio. And since we're looking at a new home in Irvine, I'm actually leaving $100k on the sidelines in my portfolio so that I wouldn't be forced to sell stocks if we were to get a home.
Title: Re: I-Bonds...a great place for idle cash
Post by: ChiKid24 on October 13, 2021, 12:27:16 PM
So does that mean both you guys hold 100% equities in your portfolio? I guess that's a strategy, but it's not without risk.

I am. And I'm aware that the stock market isn't without risk, but it's a risk I can tolerate. I'm leaving $150k in savings account for emergency fund, so I can weather a downturn in my stock portfolio. And since we're looking at a new home in Irvine, I'm actually leaving $100k on the sidelines in my portfolio so that I wouldn't be forced to sell stocks if we were to get a home.

You're kind of where I was when I made the move. Your emergency fund seems well funded (like mine was), so a 1-year hold on $10k-$30k (if you're married and have a trust) doesn't seem like a huge risk. What rate are you earning on it?
Title: Re: I-Bonds...a great place for idle cash
Post by: zubs on October 13, 2021, 12:42:01 PM
0.4% @ Capital One!
Title: Re: I-Bonds...a great place for idle cash
Post by: sleepy5136 on October 13, 2021, 12:54:42 PM
Idle cash to me means cash not part of your emergency funds. Assuming that, bonds would be a "safe" place to store it but not necessarily the best. I would argue S&P500 would be another safe bet that would beat bonds. But obviously you gotta pay the gains if you sell it. But again, if it's not part of your emergency funds, you don't need to sell. I don't think people should generally sell and instead reinvest unless you absolutely have to use the money.
Title: Re: I-Bonds...a great place for idle cash
Post by: CalBears96 on October 13, 2021, 01:28:11 PM
You're kind of where I was when I made the move. Your emergency fund seems well funded (like mine was), so a 1-year hold on $10k-$30k (if you're married and have a trust) doesn't seem like a huge risk. What rate are you earning on it?

I haven't checked the rate recently since my wife takes care of the account. I think it's probably around 0.4% to 0.5%.
Title: Re: I-Bonds...a great place for idle cash
Post by: freedomcm on October 14, 2021, 06:48:09 AM
I had to look it up, but I-bonds actually mature in 30 years, not 20. 

(whew, I have some 20+, but not yet 30+)
Title: Re: I-Bonds...a great place for idle cash
Post by: ChiKid24 on October 14, 2021, 07:04:24 AM
I had to look it up, but I-bonds actually mature in 30 years, not 20. 

(whew, I have some 20+, but not yet 30+)

Thanks for the correction. Thankfully they don't need to be held to maturity. Can be redeemed anytime after one year.
Title: Re: I-Bonds...a great place for idle cash
Post by: Cares on October 14, 2021, 08:51:26 AM
I Bonds going to be 7%+ coming this November. If you haven't purchased your $10k this year I suggest waiting until November to purchase and then purchase another $10k in January.

You can purchase $10k per spouse and also another $10k in a trust account.
Title: Re: I-Bonds...a great place for idle cash
Post by: ThirtySomethingWEquity on October 14, 2021, 10:29:47 AM
How do I buy them? Just fire up robinhood or TDAmeritrade?
Title: Re: I-Bonds...a great place for idle cash
Post by: CalBears96 on October 14, 2021, 11:16:04 AM
I Bonds going to be 7%+ coming this November. If you haven't purchased your $10k this year I suggest waiting until November to purchase and then purchase another $10k in January.

You can purchase $10k per spouse and also another $10k in a trust account.

By trust account, it includes a living trust account?
Title: Re: I-Bonds...a great place for idle cash
Post by: ChiKid24 on October 14, 2021, 11:39:24 AM
I Bonds going to be 7%+ coming this November. If you haven't purchased your $10k this year I suggest waiting until November to purchase and then purchase another $10k in January.

You can purchase $10k per spouse and also another $10k in a trust account.

I'd actually suggest its better to purchase now than waiting until November. The hold period is a minimum of 1-year.  Purchasing now gets you 3.54% for the 1st six months then you get the 7.12% for the next six months. If you wait, you'll get 7.12% the first six months, then whatever the next reset rate is in May for the next six months. If you think that will be higher than 3.54% then I suppose waiting until November makes sense. I'd rather lock in the 3.54% now given it's a better return than any savings account and I'd still get the 7.12% in six months.
Title: Re: I-Bonds...a great place for idle cash
Post by: ChiKid24 on October 14, 2021, 11:41:06 AM
How do I buy them? Just fire up robinhood or TDAmeritrade?

Unfortunately they can only be purchased at Treasury Direct. The website is clunky and takes some time. Would suggest starting the process if you are interested. See the link I included on original post
Title: Re: I-Bonds...a great place for idle cash
Post by: Cares on October 14, 2021, 11:27:58 PM
Treasury Direct is super clunky for sure. You're required to put in your password with your mouse and a virtual keyboard. Really annoying.
Title: Re: I-Bonds...a great place for idle cash
Post by: Cares on October 14, 2021, 11:29:27 PM
I Bonds going to be 7%+ coming this November. If you haven't purchased your $10k this year I suggest waiting until November to purchase and then purchase another $10k in January.

You can purchase $10k per spouse and also another $10k in a trust account.

By trust account, it includes a living trust account?

Yes Living Trust. Just open a Treasury Direct account and select Trust when signing up.
Title: Re: I-Bonds...a great place for idle cash
Post by: hurijo on October 21, 2021, 09:39:04 AM
For those with experience with I-bonds, can you redeem(withdraw) partial amounts from your bonds? For example, if you purchased $10k in I-bonds, can you withdraw just $2k at a time? Or do you have to withdraw the entire $10k?
Title: Re: I-Bonds...a great place for idle cash
Post by: ChiKid24 on October 21, 2021, 02:43:02 PM
For those with experience with I-bonds, can you redeem(withdraw) partial amounts from your bonds? For example, if you purchased $10k in I-bonds, can you withdraw just $2k at a time? Or do you have to withdraw the entire $10k?

After 1-year hold, you can redeem as little as $25 at a time. See Treasury Direct for lots of good information: https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iredeem.htm
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