EE Savings Bond/Roth IRA Basic Math Question

A place to talk about speculative investing ideas for the optional Variable Portfolio

Moderator: Global Moderator

Post Reply
barrett
Executive Member
Executive Member
Posts: 1982
Joined: Sat Jan 04, 2014 2:54 pm

EE Savings Bond/Roth IRA Basic Math Question

Post by barrett » Wed Jan 14, 2015 8:46 pm

Not sure if I am looking at all the correct math angles on this so I'd like to get some input.

I have some EE bonds that hit their doubling date recently. They are now earning about 1.4% and I am thinking seriously about cashing them in, paying taxes on the gains, and putting the proceeds into a Roth IRA (I am self-employed and can put quite a lot into the Roth/Solo 401k Roth combo).

I should have enough deductions to get me in the marginal 15% tax bracket for 2015.

If I set up a 4X25 PP with this money and assume a nominal rate of return of 6% per year, AND I intend to keep that money in the Roth for say ten years, then this is a no brainer, correct?. Seems to me that I break about even after four years, and, as an added bonus, I will have already paid the taxes on the gains.

Alternatively I could leave some of that money as taxable and buy gold coins.
User avatar
MachineGhost
Executive Member
Executive Member
Posts: 10054
Joined: Sat Nov 12, 2011 9:31 am

Re: EE Savings Bond/Roth IRA Basic Math Question

Post by MachineGhost » Thu Jan 15, 2015 2:15 am

I have some EE bonds hitting their doubling date next year and I too wonder if it's worth cashing them in.  It seems like it may be pointless as long as interest rates are lower than the current rate?
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes

Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet.  I should not be considered as legally permitted to render such advice!
barrett
Executive Member
Executive Member
Posts: 1982
Joined: Sat Jan 04, 2014 2:54 pm

Re: EE Savings Bond/Roth IRA Basic Math Question

Post by barrett » Thu Jan 15, 2015 12:00 pm

MachineGhost wrote: I have some EE bonds hitting their doubling date next year and I too wonder if it's worth cashing them in.  It seems like it may be pointless as long as interest rates are lower than the current rate?
I think it's more complicated than that depending on what tax bracket you are in now versus five or ten years down the line. The tax-free Roth aspect counts for a lot & expected return over time is important too. At 1.4%, that $1000 bond is only worth $1149 after ten years (it's amazing how poorly compounding works at extremely low rates). If you invest the $850 you have after paying 15% in taxes, after ten years of a nominal PP growth of 6%, you have $1522. At least those are the numbers I am coming up with. Multiply that by 20 or 30 bonds and you are talking real money.

I've almost talked myself into this! :)
Pet Hog
Executive Member
Executive Member
Posts: 257
Joined: Tue May 28, 2013 4:08 pm

Re: EE Savings Bond/Roth IRA Basic Math Question

Post by Pet Hog » Thu Jan 15, 2015 1:17 pm

barrett wrote: I have some EE bonds that hit their doubling date recently. They are now earning about 1.4% and I am thinking seriously about cashing them in, paying taxes on the gains, and putting the proceeds into a Roth IRA (I am self-employed and can put quite a lot into the Roth/Solo 401k Roth combo).
Hi Barrett

I think the situation is even better than break-even after four years.  Bear in mind that you pay tax on the gains, not the whole bond, so a bond valued at $1000 that has just doubled means an initial purchase of $500.  Tax on the $500 gain at 15% would be $75, meaning you'd have $925 to invest in the Roth.  A PP return of 6% for two years would grow $925 to $1039.  Leaving $1000 in EE bonds would grow at 1.4% to $1028.  So I would anticipate breaking even after two years.
barrett
Executive Member
Executive Member
Posts: 1982
Joined: Sat Jan 04, 2014 2:54 pm

Re: EE Savings Bond/Roth IRA Basic Math Question

Post by barrett » Thu Jan 15, 2015 5:11 pm

Pet Hog wrote: I think the situation is even better than break-even after four years.  Bear in mind that you pay tax on the gains, not the whole bond, so a bond valued at $1000 that has just doubled means an initial purchase of $500.  Tax on the $500 gain at 15% would be $75, meaning you'd have $925 to invest in the Roth.  A PP return of 6% for two years would grow $925 to $1039.  Leaving $1000 in EE bonds would grow at 1.4% to $1028.  So I would anticipate breaking even after two years.
Duh! Thank you, Pet Hog. I am such a turkey! This falls into the category of "stuff I used to know but have somehow forgotten." Thank you for setting me straight on this!
User avatar
sophie
Executive Member
Executive Member
Posts: 1959
Joined: Mon Apr 23, 2012 7:15 pm

Re: EE Savings Bond/Roth IRA Basic Math Question

Post by sophie » Fri Jan 16, 2015 2:58 pm

Slightly confused ... are you holding the bonds outside the PP?  If so, no problem splitting four ways and making even contributions to each PP asset.  You could even leave the "cash" portion alone, to continue spitting out 1.4% for you.  That return free of state/local taxes is nothing to sneeze at.

Do you have savings in T bills or somewhere earning less than 1.4% interest that you can use for your Roth contribution instead?
"Democracy is two wolves and a lamb voting on what to have for lunch." -- Benjamin Franklin
barrett
Executive Member
Executive Member
Posts: 1982
Joined: Sat Jan 04, 2014 2:54 pm

Re: EE Savings Bond/Roth IRA Basic Math Question

Post by barrett » Fri Jan 16, 2015 5:01 pm

Sophie, These EE Bonds are all outside of my APAP and it's money I don't plan on using for a long time. And, no, no T-Bills to sell instead. Also, my Roth accounts can really use some beefing up.
Post Reply