New I Bond rates have increased!

[barrett]

dualstow, you sleuth! I forgot today was the day that the new composite rate was released. Do you ever sleep?

[dualstow]

dualstow, you sleuth! I forgot today was the day that the new composite rate was released. Do you ever sleep?

There was a gas leak and an explosion in my neighborhood at 3am so not last night, no. 

[rickb]

I guess another way to look at I-Bonds: They are like my ROTH. Deferring taxes until later.

I think you mean non-ROTH IRA.  With a ROTH you contribute after-tax money which grows tax free (not tax deferred) and you never pay tax on the earnings.  In a regular (non-ROTH) IRA, you contribute pre-tax money which grows tax deferred and you pay tax (I think regular income tax, whether or not it was a capital gain) on everything you withdraw.

[sophie]

dualstow, you sleuth! I forgot today was the day that the new composite rate was released. Do you ever sleep?

There was a gas leak and an explosion in my neighborhood at 3am so not last night, no. 

Yikes!!  I hope you and your home were ok?

I saw they lowered the fixed rate to 0.10% - darn it.  Still, see old posts by MediumTex singing the praises of I Bonds.  Among other things, it's like adding $10K/year/person to your IRA space.

[dualstow]

Fine, thanks.
Hey Sophie, what do you think of this argument that I-Bonds are not a good idea if one expects to be in a high tax bracket down the road?
Do you redeem yours early?
http://www.bogleheads.org/wiki/I_saving ... ax_bracket

[barrett]

dualstow, please quit calling me Sophie.

She'll likely weigh in soon enough with a typically insightful post, but I just wanted to say that I loaded up on EE-Bonds in 1991-1993 and am definitely trying to figure out my redeeming strategy for the 2021-2023 period when I will be 62-64 years old. It's money for early retirement but also gives me bit of a disincentive to earn as much during that time period. (I am a victim of self inflicted welfare!). By then over 80% of the value of my bonds will be taxable income.

One thought though is that the 30-year timeframe allows people to hold the bonds quite a long time which opens up options on when to cash in (redeem less in year when income is higher or when taking larger distributions from taxable IRAs).

[dualstow]

dualstow, please quit calling me Sophie.

Surely.  Barrett, what do you think?

One thought though is that the 30-year timeframe allows people to hold the bonds quite a long time which opens up options on when to cash in (redeem less in year when income is higher or when taking larger distributions from taxable IRAs).

I'm thinking along the same lines.
I'm really not sure if my bracket will be high or low in the future.

[barrett]

Sophie, this may be a stupid question but why is the fact that the fixed rate is only .10% important? To me the "1.84% annualized rate of inflation as measured by the Consumer Price Index" is more important because it adds juice to the yields of all my I-Bonds going back to 1999. The lower fixed rate obviously matters some but does it matter a lot? Thanks.

These savings bonds threads have really helped me. Specifically, up until a few months ago, I didn't know about the "guaranteed doubling" on EE bonds at a certain date (i.e., for me some bonds bought between 1997 and 1999 have 17-year doubling times). I almost sold some EE bonds because the yield I saw on my inventory was so crappy. But then they get this jolt at the 17-year mark (before settling back to their crappy rates).

[sophie]

Fine, thanks.
Hey Sophie, what do you think of this argument that I-Bonds are not a good idea if one expects to be in a high tax bracket down the road?
Do you redeem yours early?
http://www.bogleheads.org/wiki/I_saving ... ax_bracket

If I'm in a high tax bracket during retirement, I'll buy myself some really good booze and celebrate!

See previous posts as regards people who are planning to work full time for more than another 30 years (barrett?).  Note that you can't actually choose when to pay the taxes - my understanding is that the taxes are due at maturity whether you cash in the bond or not.  Still, the fact that interest was able to compound tax free for 30 years means that even after you pay the tax bill, you're probably ahead of where you'd be if you put the money into, say, a CD.

Sophie, this may be a stupid question but why is the fact that the fixed rate is only .10% important?

After all those years of 0% fixed, a positive fixed rate was so great to see and then they cut it in half. The I Bond formula is computed as the floating rate PLUS the floating rate multiplied by the fixed rate - so it will definitely have an effect.

[MachineGhost]

Sophie, this may be a stupid question but why is the fact that the fixed rate is only .10% important? To me the "1.84% annualized rate of inflation as measured by the Consumer Price Index" is more important because it adds juice to the yields of all my I-Bonds going back to 1999. The lower fixed rate obviously matters some but does it matter a lot? Thanks.

The fixed rate is your real return; the inflation adjustment is a mirage.  So locking in .10% for 30 years is pretty crappy, especially compared to nominal bonds that can adjust by more than the fixed rate the U.S. Treasury decrees for us poor peons.  Despite that, I did buy last year when the fixed rate was 0% because not losing to inflation is better than losing to inflation.

Keep in mind when the fixed rate goes higher (and it surely will if higher inflation ever resumes), there will be a crossover point where it will be advantageous for you to cash in your old and convert to the newer rate.  It'll just be hard to do with the $10K limit.

[barrett]

Going slightly off topic here but does anyone know why the purchase limit on savings bonds was lowered in the first place? Seems like the government wouldn't want to put limits on how much it can borrow.

Here is what it says on the TreasuryDirect site:

Why is there a purchase limit on savings bonds?

The purpose of the savings bonds program is to provide individuals with a way to save or invest relatively small amounts of money in non-marketable Treasury securities. Individuals with saving or investment needs in excess of the savings bond purchase limit who desire the safety and stability of Treasury securities may purchase marketable Treasury securities (bills, notes, bonds and inflation-protected TIPS)...

And this from the same site in 2007:

The reduction from the $30,000 annual limit in effect for both series since 2003 was made to refocus the savings bond program on its original purpose of making these non-marketable Treasury securities available to individuals with relatively small sums to invest.

Anyone care to explain? Thanks.

[MachineGhost]

Anyone care to explain? Thanks.

Rich people were taking advantage of it.