I Bond at 7%???

[suedavids]

The I-bonds are only state tax free. However, the bonds are tax deferred meaning you don't pay tax until you sell them.

[suedavids]

Originally Posted by jmjj215

Isn't the interest fed/state tax free?

By buying in smaller chunks you're "diversifying" in a sense - sounds good down that avenue also.

Buying smaller chunks has nothing to do with diversification. Diversification means you have different types of investments or savings. So.... holding a mutual fund and a mix of bonds like the i-bond is diversification.

Now you could look at it as a diversification of rates but this instead is called laddering. You hold bonds or CD's with different issuances and maturity rates.

[baselle]

Originally Posted by jmjj215

Isn't the interest fed/state tax free?

By buying in smaller chunks you're "diversifying" in a sense - sounds good down that avenue also.

State taxes - free
Local taxes - free
Federal taxes - deferred until you redeem them or after 30 years when the bond matures, but only the interest that they accrue is taxed. Interest is treated as income, and taxed in your tax bracket. If you're in retirement after 30 years and you are in a lower tax bracket, that works out well.

If you use the bonds for educational purposes (and the feds are tough about that tuition and books but not pizza) and your income is low enough, the federal taxes are free. Here's where it also makes sense to not buy bonds in a lump. You want to avoid redeeming a $10,000 bond to pay for $5,000 worth of qualified expenses!

So if you have a lump of bonds and you wait for 30 years, you have what is called the "tax bomb". If you plan on getting a ton of bonds and plan on being in a higher tax bracket after 30 years (aren't we all?), you can pay taxes yearly on your bonds, but you have to do it at the start and for all your bonds.

So savings bonds are great but they're tricky! Not as straightforward as an ED/ING account.

[weiwentg]

Originally Posted by suedavids

Buying smaller chunks has nothing to do with diversification. Diversification means you have different types of investments or savings. So.... holding a mutual fund and a mix of bonds like the i-bond is diversification.

Now you could look at it as a diversification of rates but this instead is called laddering. You hold bonds or CD's with different issuances and maturity rates.

buying smaller chunks would be like dollar cost averaging.

[Russell]

OK I have $30k to move from ED to I-Bonds and I'd like to purchase the bonds in Nov (to take full advantage of the higher rates) when the new rates come out.

Now following your advice of buying these in smaller chunks should/can I buy 6 bonds at $5k each back to back (all within the same week for e.g) ?

[VJW]

You can buy them all within the same hour if you like.

#

[jmjj215]

Originally Posted by suedavids

Buying smaller chunks has nothing to do with diversification. Diversification means you have different types of investments or savings. So.... holding a mutual fund and a mix of bonds like the i-bond is diversification.

Now you could look at it as a diversification of rates but this instead is called laddering. You hold bonds or CD's with different issuances and maturity rates.

I was talking about laddering your i-bond holdings - spreading across different fixed rates. - thanks for the correction.

[baselle]

Originally Posted by Russell

OK I have $30k to move from ED to I-Bonds and I'd like to purchase the bonds in Nov (to take full advantage of the higher rates) when the new rates come out.

Now following your advice of buying these in smaller chunks should/can I buy 6 bonds at $5k each back to back (all within the same week for e.g) ?

You sure can. FYI 30K is the upper limit on the amount of I-bonds that you can buy in a year.

If you really want to push it, you can buy 30K electronically and 30K in paper. And your spouse (different social security number) can buy 30K electronically and 30K in paper.

[terry1156]

Originally Posted by Russell

OK I have $30k to move from ED to I-Bonds and I'd like to purchase the bonds in Nov (to take full advantage of the higher rates) when the new rates come out.

Now following your advice of buying these in smaller chunks should/can I buy 6 bonds at $5k each back to back (all within the same week for e.g) ?

Someone please correct me if I'm wrong here, but I don't think it will make much of a difference. The rate stays the same for the entire 6 month period. If you want to ladder then, you should buy $15000 in October (current rate of 4.8% with a base of 1.2% and then the other $15000 in November where you'll have a new rate and base. If you buy in November and then again in December, it will still be the same rate.

[suedavids]

Originally Posted by Russell

OK I have $30k to move from ED to I-Bonds and I'd like to purchase the bonds in Nov (to take full advantage of the higher rates) when the new rates come out.

Now following your advice of buying these in smaller chunks should/can I buy 6 bonds at $5k each back to back (all within the same week for e.g) ?

First off, I am not sure what "moving from ED" means.

Now to answer your question. The advantage of buying in smaller amounts is that if you need to liquify some money for future needs you would not need to liquify a larger than needed amount. I-bonds are very flexable in the amount you purchase. The difference between paper and electronic is that with paper, you buy a specified denomination. With electronic, you can buy a specific dollar amount to the penny. Both range from $25 ($50 for paper) to $30,000 denominations. Below I have clipped the specifications from the website: http://www.savingsbonds.gov/indiv/pr...nds_glance.htm


Current Rate: 4.80% through October 2005
Minimum purchase: $50 for a $50 I Bond when purchasing paper bond certificates

$25 for a $25 I bond when purchased electronically via TreasuryDirect
Maximum purchase: $30,000 in TreasuryDirect and $30,000 in paper bonds
Denominations: Paper bonds: $50, $75, $100, $200, $500, $1,000, $5,000, $10,000

Electronic bonds via TreasuryDirect: purchase to the penny for $25 or more
Issue Method: Paper bond certificates or electronic transfer to TreasuryDirect accounts

My closing thought is for you to give some thought to what you may need in the future when cashing in these bonds. For instance, we are buying i-bonds for the purpose of using them in retirement. So I will be purchasing either $1,000 or $5000. These bonds will be used for monthly bills. You need to determine future usage. You may just want to buy a large some all at once but it isn't that much trouble breaking it up into smaller amount. The problem with holding smaller amounts is actually holding them (more paper). But with the electronic, it is just a line entry.

One additional thing. On these postings and on the main page of the savingsadvice main page they were talking about these bonds being at about 7%. I do not think they will be this high so I would see in Nov. and make a decision at that time. Remember they change payment amounts every 6 months. So far I have been pleased with them. What I have found in the past is that even when these bonds were paying 3% is was a higher rate than CD's or money market which offset the 3 month penalty if you needed to liquify after one year. If you hold them for 5 years there is no penalty (and actually 5 years goes real fast!).


I hope this answers some of your questions.

[suedavids]

Originally Posted by terry1156

Someone please correct me if I'm wrong here, but I don't think it will make much of a difference. The rate stays the same for the entire 6 month period. If you want to ladder then, you should buy $15000 in October (current rate of 4.8% with a base of 1.2% and then the other $15000 in November where you'll have a new rate and base. If you buy in November and then again in December, it will still be the same rate.

From the website: http://www.publicdebt.treas.gov/sav/sbirate2.htm

You will notice that the base rate went up last time form 1% to 1.20%. It is my thought that it will remain the same or go up. If you believe it may go up, and the inflation rate has gone up, then the chances are you will get at least the same if not a better rate in Nov. Remember your future rates are based on fixed rates + an inflation calculations. You can see that people that bought with fixed rates of 3% have big fat smiles on their faces For people now, a smaller smile

DATE FIXED RATES*
May 1, 2005 1.20%
NOV 1, 2004 1.00%
MAY 1, 2004 1.00%
NOV 1, 2003 1.10%
MAY 1, 2003 1.10%
NOV 1, 2002 1.60%
MAY 1, 2002 2.00%
NOV 1, 2001 2.00%
MAY 1, 2001 3.00%
NOV 1, 2000 3.40%
MAY 1, 2000 3.60%
NOV 1, 1999 3.40%
MAY 1, 1999 3.30%
NOV 1, 1998 3.30%
SEP 1, 1998 3.40%
*annual rates compounded semiannually
http://www.publicdebt.treas.gov/sav/sbirate2.htm

[Russell]

I found this on http://einvesting.com/about1035.html and I quote:

In general, be careful with i-bonds. They pay a fixed amount above the inflation rate, adjusted every 6 months. Currently they pay 1.2% above the inflation rate of 3.6% for a 4.8% yield. You pay federal income tax on the interest when you cash them out (or 30 years, whichever comes first). The 1.2% represents 25% of the interest so the person in the 28% bracket ends up losing.

Is the 25% vs 28% part true ? We might be in the 28% bracket next year since we don't have a house to do itemized deductions anymore. We certainly won't be leaving the money in the I-bonds for more than 5 yrs since we'll need it to purchase the house.

Sue, when I said ED I meant Emigrant Direct account that pays 4.0% interest right now and your money is completely liquid.

[suedavids]

Originally Posted by Russell

I found this on http://einvesting.com/about1035.html and I quote:



Is the 25% vs 28% part true ? We might be in the 28% bracket next year since we don't have a house to do itemized deductions anymore. We certainly won't be leaving the money in the I-bonds for more than 5 yrs since we'll need it to purchase the house.

Sue, when I said ED I meant Emigrant Direct account that pays 4.0% interest right now and your money is completely liquid.

Russell,
The quote you mentioned is very confusing so I can't comment on it's validity. Now here is the scoop about taxes.

Interest bearing income such as CD's, bank accounts, your ED account and i-bonds (or E, H , bonds) are considered interest and are taxed at your income rate. Remember that the income tax structure is stair stepped so if you are just over into the 28% bracket, only the amount into that level is taxed at that rate. Thus a portion of your income is taxed at each lesser rate within the brackets. So you do not pay 28% on your total amount. In saying that, interest will bring your income up and it may end up in the 28% bracket.

So what are the options for savings and investment? If you take greater risk and you hold stocks or mutual funds less than one year (selling them within the year - this is known as short term) the gains are added to your income. If they are held more than 12 months, you are taxed at a flat capital gains rate of 15% (very sweet but this is to sunset in 2008 and revert back to 20%). Also, if you get dividends from stocks, these are also taxed at 15%.

Interest (such as i-bonds or ED) does not have such a low tax rate and are taxed at your income rate. So yes you will pay more taxes on them but they are also tax defferred and are taxed at the time of turning them in. So you can control this by offsetting through contributing to a pension plan or other deductions such as a home interest.

You also have to understand that i-bonds are just one egg in a basket of many savings/investment vehicals you should build in your portfolio. If you want a secure, garanteed generous interest rate. i-bonds are paying more than ED or CD's and the best part is that you do not pay state income tax on i-bonds. With ED or CD's or other interest bearing savings vehicals, you will pay state tax. If you use thse for education, they are federally tax free but these have an income limit. According to bob brinker (check him out at www.bobbrinker.com - host of money talk- I've done very well by his advice), he thinks i-bond rates will be in the high 6's.

I know I have rammbled but the bottom line is than for fixed savings, I-bonds have outperformed similar types of fixed savings vehicals in the past several year. You do have to hold them one year and if the performance changes in the future. Well, just sell them. The 12 month holding period goes fast ( remember that a 3 month penalty is applied if held under 5 years). After that period you can always reassess. Remember you don't have to put all your money in one place. You may only want to put a portion in i-bonds and reserve some for liquidity in a flexable money market. Stocks and mutual funds are another option but with higher risk and the discussion was only about fixed income savings. To build a total portfolio, you need to build a mix of various investments.

Hope this helped answer some of your questions.

[suedavids]

Originally Posted by Russell

I found this on http://einvesting.com/about1035.html and I quote:



Is the 25% vs 28% part true ? We might be in the 28% bracket next year since we don't have a house to do itemized deductions anymore. We certainly won't be leaving the money in the I-bonds for more than 5 yrs since we'll need it to purchase the house.

Sue, when I said ED I meant Emigrant Direct account that pays 4.0% interest right now and your money is completely liquid.

One additional thing. If possible, when you purchase your new home, try to put at least 20% down. You will avoid a PMI charge which is equivalent to about 1 months payment. This is insurance if you don't meet the 20% threshold you must pay. Some loan officers are doing creative financing that eliminates that PMI.

Also you are noticing that as the interest rates are going up, the housing market slowing If this continues, this will put you in the drivers seat (if you don't own already). This is what happened in the late 70's where housing prices escalated then with high interest rates, house prices went down. I still remember homes not selling for months and months. My husban did house closing with interest rates at 14%. Our first home we had a 10% rate (1980) and we thought we had it made since other friends loans were much higher. I don't think rates will ever be that high again but this is mentioned just to let you know that there are ebs and flows to the ecomomy throughout your life. Be a wise shopper for your home and KNOW the market and don't over pay. Best advice- location, location, location. Buy where you know others would like to live.

So what is the tax advatages to home ownership? Tax deducatbility in the loan. Be careful, there is talk on capital hill to possibly change future tax deductions on home loans. Secondly, as the tax law is in place now, any gains on your home if live in for at least 2 years is completly tax free. That is another reason home prices have taken off.

[Russell]

Sue, thank you so much for taking the time to explain

I've learnt more in your last two posts than I did scouring the 'net for the info. I'm saving your posts as text files on my PC.

[jeffrey]

The <a href="http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_i_rates.htm">Treasury Department</a> has announced the I-Bond interest rate from November to April is <b>6.73%</b>. This rate includes a fixed rate of 1.0% (down from 1.2%) and an inflation adjusted rate of 5.73%.

____________________________
<a href="http://www.i-bondrate.com">I-Bond Rate</a>

[jmjj215]

I love rampant speculation

Thanks for the info jeffrey

[ken1706]

I'm very disappointed to see the fixed rate go down today. Looks like the Treasury decided to offset the high inflation rate component with a lower fixed rate component. The 1.0% fixed rate matches the lowest level it's been. It was that low for most of 2004. Back in 2000 it was as high as 3.6%. I thought for sure it was going to slowly continue to rise. Looks like it's going to be a long time before we see it anywhere close to 3.6%.

[Russell]

Yeah, I too am disappointed

So what happens if next year they decide to lower the inflation rate to 3% ? Will it be paying 4%...that would be worse than ED/ING because most likely the interest rates will rise in general and ED/ING will be paying more than the current 4%. Lets hope they adjust the base interest rate higher when they do lower the inflation rate...

I guess I'll move my unused money into I-Bonds anyway...

[suedavids]

yep. I was surprised that the base rate went back to 1 %. I suspect that someone in the Gov. is trying to keep expenses down. Wouldn't that be the first! It still is probably the best deal for fixed accounts. I just may not committ as much as I had intended.