Ibond question

Ibonds are not a long term investment. They are designed to essentially break even with your purchasing power of your investment. If you are young and don't need the money for 5+ years, odds are investing in the market today will beat Ibonds pretty substantially.

I bonds probably get too much love around here, but you’re not going to find a better guaranteed option over 12 months, taxes be damned.

ETA- also, if you’re in the top tax bracket of MFJ, putting aside $20k in I bonds shouldn’t stop you from saving in traditional investments with your other income.

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5 years ago, maybe. But not 5 years looking ahead, no way.

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We shall see. I think it is pretty crazy to think the stock market won't beat inflation + a few basis points over the next 5 years starting today.

I don't view I bonds as an investment (i.e. expecting it to make me richer), but that doesn't mean I wouldn't hold them long term. I bonds (and TIPS) won't make you rich, but they can keep you rich. There is a reason, the govt sets a limit on I bonds unlike TIPS.

I bonds are perfect to hold your emergency fund as they are liquid (after 1 year), risk free, can never lose value and maintains purchasing power. I've got a year's worth of basic expenses in I bonds already and will keep on buying. I wish I knew about them earlier and more importantly understood their value.

As someone who is looking to retire early within 10 years; I've been reading on how to retire, setup my portfolio etc. It's alot harder than I thought it would be. One common thing I've come across is using both TIPS and I bonds to establish a risk free and inflation protected annual income. This is very appealing as high inflation is the worst thing in retirment. Sure stocks can beat inflation over time, but you might not have time once you're older.

The problem with I bonds is the annual limit, so to have a significant amount you have to start accumulating early. TIPS don't have that problem and can even outperform I bonds as well which they are doing now as their rates have turned positive again.

That said, I wouldn't take money I wanted invested in stocks to buy I bonds just because the rate is high.

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I use it as a place to set my extra emergency fund. Instead of having it set somewhere with little or no interest.

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This is a great way to use it IMO

I assume your money is inaccessible for 12 months?

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Looking into it more, it seems that if one is in the top tax bracket, even if you hold on for whole time, if you are still in that top bracket, then you possibly lose more money with the taxes rather than keep up with inflation.

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Now the accountants on here would be able to answer this better, but I'm confused about what you mean about "if one of us is in the top tax bracket." It sounds like you're talking about married filing separately, but in that case, wouldn't it only matter for the portion of the Ibonds that was bought for each individual?

In other words, if you both bought and sold IBonds, and you're filing separately, then I would think that each of you would be taxed at your individual marginal rates when sold.

And you could always strategically sell them (e.g., maybe your marginal tax rate differs from year to year, so sell when at a lower rate), and/or strategically determine how you're going to file your taxes (e.g., if filing joint makes more sense).

This is probably a good example of it being worth the cost to have a professional help out, since tax planning is a little more complicated and specific to the individual.

Overall though, based on what you've provided, if you're going to be subjected to 37% taxes on the interest, plus 3-month interest penalty unless you hold them for 5 years, AND since IBond rates should be near their peak, there is a good chance your overall ROI will be lower than the overall market taxed at more long term rates (probably 20% although local and state taxes may make that higher). I'm also not sure if the 3.8% net investment tax would pertain to IBonds interest or not (if not, but it would apply to other gains, then it would make IBonds a bit more favorable than if it is subjected to it).

Regardless, while paying taxes sucks, and they should be considered when making financial investment/savings decisions, having to consider the impact of ~40% tax rates, is a good problem to have, IMO, because that means you have a lot of income.

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I assume your money is inaccessible for 12 months?

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Correct with one exception: if an area is hit by a natural disaster (say a hurricane makes it all the way to BR and causes severe damage) the 12 month rule can be waived by Treasury. Check the news section on TreasuryDirect for examples.