ibonds

[swampthing]

what's up with ibonds? a safe investment at this time?

[kork13]

certainly. I-Bonds are always a safe investment, and a smart one at that. You just need to be aware of the limits, disadvantages, and potential pitfalls also involved. For example, you can only buy $5000/yr in I-Bonds.

But the government's finances are stable, investments backed by the government are still safe, and there are absolutely some distinct advantages to including I-Bonds as a part of your investment portfolio.

[DaveL]

The ibonds are a great protection against inflation which may be picking up soon. Also, if you need to cash them out early, the penalty isn't too bad, only 3 months worth of interest.

[rigz]

The ibonds are a great protection against inflation which may be picking up soon. Also, if you need to cash them out early, the penalty isn't too bad, only 3 months worth of interest.

ive heard about ibonds on the radio recently. can someone explain a little bit more on how they work and why they are a good idea.

where can I buy ibonds?

[Slug]

You buy them exclusively at Treasury Direct after this year. Through the rest of this year you can also buy them at virtually any bank.

[jpg7n16]

ive heard about ibonds on the radio recently. can someone explain a little bit more on how they work and why they are a good idea.

where can I buy ibonds?

You can do both here: Individual - I Savings Bonds

[swampthing]

can someone explain to me how the fixed rate works? because right now the fixed rate is 0% but it seems like you get 4.6% which is decent. i dont get it

[Slug]

Here you go.

Individual - I Savings Bonds Rates & Terms

[swampthing]

yea but i don't exactly understand it.

[kork13]

The calculation is sorta complex, but the principle is simple. Basically, the fixed rate is the constant portion of your earnings, whereas the inflation rate will fluctuate with time. If you buy a bond with a 0.0% fixed rate, it'll have that 0.0% fixed rate for the life of the bond (up to 30 years). The 2.3% inflation rate applies to the current 6-month period, then it'll change again in November. The two rates are combined into the total (composite) rate. For a bond bought right now, you will earn 4.6% until November, when the inflation rate will change up or down. Historically (last 5-10 years), composite rates have averaged around 4%.

[jpg7n16]

can someone explain to me how the fixed rate works? because right now the fixed rate is 0% but it seems like you get 4.6% which is decent. i dont get it

The fixed rate is the income payout rate as a percentage of the par value.

The current rate of return is the most recent rate of return including both interest payments made and adjustments made to that par value. (if no interest was paid, the full 4.6% was an adjustment to par value)

So if you bought $1000 par value I-bonds, you would receive income each year of 0% par aka $0 interest payments. But if returns remain similar, the par value will adjust to approx. $1046 at year end. (edit: and by 'at year end' I mean, 'after owning it for 1 year') Your interest payments would have adjusted too, but 0% of $1046 is still $0.

That $46 increase in par value must be claimed as income on your tax return, unless held in a retirement account.

[Slug]

So, the rate right now or in late May when I bought is great (4.6% annually), but it will reset again. You just have to pay attention to what it resets to and whether it's worth it to keep the bond or pay the 3 mth penalty and cash in for a more attractive instrument like a CD perhaps.

Also, you should not buy what you do not understand. If you're still confused, just choose another investment vehicle that you do.

[swampthing]

guess i'm just trying to understand the benefit of being stuck with some 0% fixed rate for 30 years.

[Slug]

guess i'm just trying to understand the benefit of being stuck with some 0% fixed rate for 30 years.

Please re-read my last post and the link I provided earlier. You are in no way tied to the 0% for 30 years.

[KTP]

That $46 increase in par value must be claimed as income on your tax return, unless held in a retirement account.

Actually for Ibonds, the interest is tax defered, which makes them even more attractive. Too bad soon you can only buy $5000 per year per SSN.

Edit: But if you do like Slug suggests and cash them out when the fixed portion is greater than 0%, then I guess you would owe tax on the interest at that time. I plan to buy $20000 this year for me and my wife, but I am going to wait until October to see if the fixed portion goes up from 0%. I want to hold them for at least 5 years to defer taxes. Not that I should be too worried about taxes as right now I have investment losses of $45,000 :-(