# New kind of "Play Money" I bonds



## peakbagger (Feb 28, 2022)

When filling out taxes this year I ended up with the Fed owing me money. It been years since I have not owed but I had an unusual tax year (two federal EV credits). Starting this year instead of getting a check there is an open to buy I bonds. I elected to get paid with I Bonds. I bonds are savings bonds whose interest rate is tied to inflation. Right now they are paying 7.12%. Every 6 months the rate changes. I was thinking I would just get a book entry account, but a bunch of envelopes showed up in the mail with real live paper I bonds. I got a bunch of Helen Kellers ($50), a couple Chief Joseph's  ($200) and an Eistein ($1000). At first glance I thought the Helen Kellers were a Hillary Clinton  https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ibondslooklike.htm

I thought the treasury had phased out the actual paper bonds as if they are bought direct, I think the only option is by book entry. They are not bearer bonds, only I can cash them as they have my name and info on them. 

Still, something I have never seen before.


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## begreen (Feb 28, 2022)

peakbagger said:


> When filling out taxes this year I ended up with the Fed owing me money. It been years since I have not owed but I had an unusual tax year (two federal EV credits). Starting this year instead of getting a check there is an open to buy I bonds. I elected to get paid with I Bonds. I bonds are savings bonds whose interest rate is tied to inflation. Right now they are paying 7.12%. Every 6 months the rate changes. I was thinking I would just get a book entry account, but a bunch of envelopes showed up in the mail with real live paper I bonds. I got a bunch of Helen Kellers ($50), a couple Chief Joseph's  ($200) and an Eistein ($1000). At first glance I thought the Helen Kellers were a Hillary Clinton  https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ibondslooklike.htm
> 
> I thought the treasury had phased out the actual paper bonds as if they are bought direct, I think the only option is by book entry. They are not bearer bonds, only I can cash them as they have my name and info on them.
> 
> Still, something I have never seen before.


We got some when they came out in November. Ours are not paper bonds, everything in the account is online. IIRC this was an option when setting up the account, but now you have piqued my curiosity. I will go back and check.


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## EatenByLimestone (Mar 5, 2022)

What is the yield on them?   A high rate gets eaten up with people driving up the price to get the rate.


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## begreen (Mar 6, 2022)

Currently it's 7%. The rate will be reevaluated around May I think.


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## peakbagger (Mar 6, 2022)

Unlike a standard bond, the interest rate changes on every I bond every 6 months. So unlike a regular bond fund, there is no playing the yield difference in what is in the fund and what is on the street.


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## Bad LP (Mar 6, 2022)

Humm. Sounds like a fun idea. We will only get back 500 bucks.


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## peakbagger (Mar 6, 2022)

So a Marshall or 2 Chief Josephs and 2 Hellen Kellers. Just keep in mind you cannot cash them in for a year and for the first five years if you cash them in you lose the last three months interest.


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## Highbeam (Apr 19, 2022)

peakbagger said:


> So a Marshall or 2 Chief Josephs and 2 Hellen Kellers. Just keep in mind you cannot cash them in for a year and for the first five years if you cash them in you lose the last three months interest.


Even losing the last three months of interest should still keep you ahead of the 0.5% interest rate you would get in a typical savings account if you just keep the bond for 4 months or more right? 

My problem with I-bonds is the stupid low limit of 10k per year per SSN, (this refund trick is on top of that). The juice ain't worth the squeeze to use these I-bonds for us.


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## peakbagger (Apr 19, 2022)

I agree but. I do know several people who are very conservative and "ladder" CDs. I Bonds are lot better than that option.


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## bigealta (Apr 19, 2022)

I could go for some Sparks, but i'm a stock guy. Long term is much better for stocks. But for some Capital preservation Spark me up!

Edit: Whoops i see they threw water on the Sparks.


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## begreen (Apr 19, 2022)

peakbagger said:


> I agree but. I do know several people who are very conservative and "ladder" CDs. I Bonds are lot better than that option.


Yes. Even though the amount is low, we will still invest in them. Between my wife and me that's 20k. She is ultra-conservative to the point of losing money due to inflation in "safe" investments so they are a good vehicle for her.  If nothing else it diversifies her portfolio. This year she has some 3yr 3% CDs that are coming to term so that money will go into the next round of I bonds. This is also a good vehicle for young people starting off that don't have a 401k and aren't comfortable gambling on the market. Right now, with the potential for a recession looming, there aren't a lot of great choices.


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## bigealta (Apr 19, 2022)

Check the historic rates. It is based on inflation so the past rates have been quite low, with this recent high inflation the rate has been driven up substantially but if / when inflation levels off or perhaps contracts in the next year or 2 or 3 the rate will collapse.


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## begreen (Apr 19, 2022)

It's a new instrument, so no history, but if you mean inflation rates, I hope that is the case actually. We'll see. The bailout cost after the first year is not egregious. We invested in real estate during the Reagan hyperinflation years and that worked out well for us.


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## bigealta (Apr 19, 2022)

begreen said:


> Yes. Even though the amount is low, we will still invest in them. Between my wife and me that's 20k. She is ultra-conservative to the point of losing money due to inflation in "safe" investments so they are a good vehicle for her.  If nothing else it diversifies her portfolio. This year she has some 3yr 3% CDs that are coming to term so that money will go into the next round of I bonds. This is also a good vehicle for young people starting off that don't have a 401k and aren't comfortable gambling on the market. Right now, with the potential for a recession looming, there aren't a lot of great choices.


My wife sounds the same, she picked the guaranteed 3% return vs,  mutual fund choices for her IRA.

But i disagree completely about I bonds being good for young people. Their time horizon is so much longer so stocks are the best by far way to go. Set up a Roth IRA and just buy Spy, IWM, Dow or individual stocks. The Roth is almost No risk as you can take your original investment amounts out without penalty.

Real estate also an excellent investment for the long haul, but it's not no work. Been a small time landlord for 35 years. I've bought at Highs 1987, and rode thru 15 years to get back to break even (also took loss 100K+ on 1 house as i could not pay the 16% interest rate)  and bought at low in 2009. Oddly enough buying at the low was scariest purchase i ever made as at the time i thought that the price could be cut in 1/2 from where i bought it. Thankfully that didn't happen.


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## bigealta (Apr 19, 2022)

begreen said:


> It's a new instrument, so no history, but if you mean inflation rates, I hope that is the case actually. We'll see. The bailout cost after the first year is not egregious. We invested in real estate during the Reagan hyperinflation years and that worked out well for us.


I must have been looking at the EE historic rates? Are they similar in their rate calculation structure?

This is the chart i was referencing.


			https://www.treasurydirect.gov/indiv/research/indepth/ibonds/IBondRateChart.pdf


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## begreen (Apr 19, 2022)

I think the market is seriously overheated. It would not surprise me if we saw a 30-40% correction in the next year or two. This doesn't feel like a good time to jump in for a new investor.



bigealta said:


> I must have been looking at the EE historic rates? Are they similar in their rate calculation structure?


No, it's a different instrument altogether. 5 yr term.


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## bigealta (Apr 19, 2022)

begreen said:


> I think the market is seriously overheated. It would not surprise me if we saw a 30-40% correction in the next year or two. This doesn't feel like a good time to jump in for a new investor.
> 
> 
> No, it's a different instrument altogether. 5 yr term.


Could be but no one will tell you when we hit a bottom, and you will be to scared to invest then and will miss it. Over the long term 15-40 years the market should be higher by quite a bit. Timing is almost impossible. Invest a bit at a time to minimize risk.

Did you invest on Mar 22, 2020? Nope neither did i, but i did a couple weeks before and  some  during the few weeks after. It was very scary, but that's when you need to pull the trigger. I also invested at much higher prices than now and those investments were more "comfortable" which is usually not the right time to buy (they have lost value). Point is timing is just to hard even the pro's get it wrong more than they get it right. So a little bit over time seems the safest way to get solid results.


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## begreen (Apr 19, 2022)

bigealta said:


> Could be but no one will tell you when we hit a bottom, and you will be to scared to invest then and will miss it.


I've been through this rodeo a few times already. I pulled out before the dot.com bust and you are right, I didn't get back in quick enough. Selling my Apple shares at $19 in retrospect is painful. However, I pulled back in 2007 too and investments made in 2009 worked out very well. That said most of my investments at this point in life are dividend-based, irrespective of market value.


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## bigealta (Apr 19, 2022)

Back to I Bond. 
Looks like this would have had (if available back then) a 0-2% interest rate over about the last 10 years, with the last 1 1/2 years moving up in steps to the now 7 Ish %. It's 100% tied to the inflation rate, with 0% added to the inflation rate to calculate the interest rate. I'm assuming if inflation goes negative so will the interest rate. I did not see if there is a minimum floor for the interest rate?

Could be an ok short term investment. But be ready to dump it.


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## peakbagger (Apr 19, 2022)

That is why I have Vanguard handle my accounts. They have a lot better chance of timing investments than I do.


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## EbS-P (Apr 19, 2022)

bigealta said:


> Back to I Bond.
> Looks like this would have had (if available back then) a 0-2% interest rate over about the last 10 years, with the last 1 1/2 years moving up in steps to the now 7 Ish %. It's 100% tied to the inflation rate, with 0% added to the inflation rate to calculate the interest rate. I'm assuming if inflation goes negative so will the interest rate. I did not see if there is a minimum floor for the interest rate?
> 
> Could be an ok short term investment. But be ready to dump it.


These were attractive to me 10 weeks ago.  I’m not sure today.  From what I have read odds of a recession are increasing.  It’s a gamble.  Probably not low enough risk now to entice me over a mutual fund.


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## begreen (Apr 19, 2022)

peakbagger said:


> That is why I have Vanguard handle my accounts. They have a lot better chance of timing investments than I do.


Sometimes yes, sometimes no. Their bond fund misguessed the market this year and I think is down by about 10%? Their inflation-protected fund is not keeping up either. I have a friend that has is IRA exclusively in Vanguard funds and was griping just a couple days ago about his losses this year. Blamed it on the administration which has little to do with the whims of the stock market. In the same time period, we have gained a little and have received some nice dividends that keep accruing. This is a crazy time for investments.


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## peakbagger (Apr 19, 2022)

Hindsight is 20/20. I really do not look at anything much shorter than 5 year performance.


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## Highbeam (Apr 20, 2022)

peakbagger said:


> That is why I have Vanguard handle my accounts. They have a lot better chance of timing investments than I do.


Vanguard's crystal ball is no better than anybody else's. There is always some expert claiming the maret will rally while another claims it will crash. Nobody knows with any certainty what the market will do which is why we can only do our best based on past statistics. I'm sure you've all heard the story that the best performing accounts are those owned by dead people. 

All to say, time in the market beats timing the market. 


bigealta said:


> The Roth is almost No risk as you can take your original investment amounts out without penalty.



The roth investment vehicle has nothing at all to do with risk. You can invest in almost anything with a roth and you can lose it all, including your original investment amount.


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## stoveliker (Apr 20, 2022)

Indeed you can loose your principal as easily in a pre-tax account as in a post tax account.


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## bigealta (Apr 20, 2022)

Highbeam said:


> Vanguard's crystal ball is no better than anybody else's. There is always some expert claiming the maret will rally while another claims it will crash. Nobody knows with any certainty what the market will do which is why we can only do our best based on past statistics. I'm sure you've all heard the story that the best performing accounts are those owned by dead people.
> 
> All to say, time in the market beats timing the market.
> 
> ...


I was trying to make the point that investing in a Roth IRA has no penalty for principal removal vs a traditional IRA. That's the no risk part. Investments within the Roth  are of course at risk.
Further i was also making the point that it's historically Much better for young investors to invest in stocks vs Bonds over the long term and one of the first places to put your long term investments would be a Roth which has good tax advantages as well.


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## stoveliker (Apr 20, 2022)

The Roth being a tax advantage depends a lot on where one lives. Investing while living in NY and retiring in TN makes Roth a poor choice given the difference in state income taxes.


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## bigealta (Apr 20, 2022)

stoveliker said:


> The Roth being a tax advantage depends a lot on where one lives. Investing while living in NY and retiring in TN makes Roth a poor choice given the difference in state income taxes.


With the Roth your Fed tax is 0 on all Interest and dividend payments. Owning Dividend stocks in a Roth (vs. owning dividend paying stocks in a regular brokerage account) is a substantial benefit over the long term.

Roth vs Traditional Ira has too many variables to go over here. Not everyone, especially self employed people,  have a traditional ira as an option. 

The whole point was that investing in bonds is a poor choice as a young long term investor. Investing in stocks and putting them in a Roth would be a much better choice.

Is their a better option, probably.


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## stoveliker (Apr 20, 2022)

But you can invest more in a traditional IRA because it's before taxes. Of course $1000 in a Roth is better than $1000 in a traditional IRA. But you in fact should compare $1000 Roth to $1250 traditional (or whatever your current tax rate is) and then look at growth and taxes at the end for the traditional.


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## bigealta (Apr 20, 2022)

stoveliker said:


> But you can invest more in a traditional IRA because it's before taxes. Of course $1000 in a Roth is better than $1000 in a traditional IRA. But you in fact should compare $1000 Roth to $1250 traditional (or whatever your current tax rate is) and then look at growth and taxes at the end for the traditional.


But many people, including me, don't have a traditional ira option.


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## stoveliker (Apr 20, 2022)

You compared Roth to traditional in post 26. I commented that that would only be fair if you invest equal $$ from before taxes because you can invest more in a traditional.


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## bigealta (Apr 20, 2022)

stoveliker said:


> But you can invest more in a traditional IRA because it's before taxes. Of course $1000 in a Roth is better than $1000 in a traditional IRA. But you in fact should compare $1000 Roth to $1250 traditional (or whatever your current tax rate is) and then look at growth and taxes at the end for the traditional.


But i do agree that maxing out an employer matched traditional ira is the Best way to go first, and agree with your Roth ira post tax contribution vs Pretax Traditional ira point and guesstimated withdrawal tax rate.


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## Highbeam (Apr 20, 2022)

stoveliker said:


> You compared Roth to traditional in post 26. I commented that that would only be fair if you invest equal $$ from before taxes because you can invest more in a traditional.


The annual contribution limit is the same whether you choose Roth or traditional ira so really you are putting more away using Roth. I like Roths.

Oh and I’ve never bought bonds, the returns have been garbage for decades and I just don’t currently need the “stability”.


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## stoveliker (Apr 21, 2022)

The majority of people don't reach the limits.

But my point on calculating return on investment is that for the Roth you have to include the money you ship to the IRS and that won't be getting a return for you. So investing in a Roth or traditional IRA to the limit means you actually paid out more dollars in the Roth route (the more going to the IRS) and those more dollars won't be getting any return over.the years.

I have the impression that this is easily forgotten. I can't explain it better.

Of course the tax paid at the end of the route over the grown sum for the traditional IRA has to be offset. But we are talking about investing here. And for a paycheck of a fixed amount, one can invest.less in a Roth because of the additional IRS expense if one does not reach the limit. And if one does, the money out of pocket for the same investment is larger for the Roth due to the taxes.

Hence my initial remark that the tax (location) matters. Not paying 6 pct state taxes now because of traditional IRA  and not paying state taxes later because of a move to a state without state taxes immediately provides gains.


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## begreen (Apr 23, 2022)

stoveliker said:


> Hence my initial remark that the tax (location) matters. Not paying 6 pct state taxes now because of traditional IRA and not paying state taxes later because of a move to a state without state taxes immediately provides gains.


Good point. Additionally, not paying taxes at the inception when one's income is at a higher tax rate will bring additional tax benefits if the money is withdrawn later, when one is at a lower tax rate.


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## EatenByLimestone (Apr 23, 2022)

I have never been convinced that my tax rate is lower now than it will be in retirement.


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## peakbagger (Apr 29, 2022)

What the heck, I set up a Treasury Account and picked up a direct I bond. Odd are the next rate period will be paying 9%.


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## bigealta (May 8, 2022)

Looks like u guys made a good move. I bond rate is now 9.62%. Even if it tanks and you sell and pay the fee it will still be a good deal.


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