Using I Bonds for Cash

Discussion of the Cash portion of the Permanent Portfolio

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Gumby
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Re: Using I Bonds for Cash

Post by Gumby » Wed Oct 27, 2010 10:16 am

walkerjks wrote:
Pkg Man wrote: I had a thought that I and EE bonds may carry a bit more intrinsic risk than a T-bill. 
I suspect the opposite is true.  Granny owns savings bonds.  Granny votes.  China owns T-Bills.  China doesn't vote. 
They are both direct obligations guaranteed by the federal government. The risk is the same.

Besides, defaulting on one would instantly destroy the credibility of the other.
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
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6 Iron
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Re: Using I Bonds for Cash

Post by 6 Iron » Fri Dec 17, 2010 4:12 pm

Finally got rolling on the I bond wagon. Set up my treasury direct account last week, and purchased paper bonds at my bank today. As a housekeeping issue, if you wish to purchase I bonds for another person, you will need their social security number. Very quick and easy to do.

If others are debating (or procrastinating), this is an easy way, as MediumTex has said, to expand your tax-deferred space.
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Austen Heller
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Re: Using I Bonds for Cash

Post by Austen Heller » Mon Dec 20, 2010 12:23 pm

Are I-Bonds worth bothering with?  That is, compared to other options such as Short-Term Treasuries or treasury MM funds.  The I-bond yearly purchase limit of $10,000 seems too low to be very helpful to a lot of people.  At the current rate of 0% fixed and 0.74% variable, you are probably not even keeping up with government-reported inflation, after paying taxes.  And when you consider the actual dollar amounts, if you max out your yearly contribution, you will be getting $74 a year, which is $6.16 a month, BEFORE taxes.  You would need to rack these things up over many years to make the numbers significant.

Also, I personally don't like having to go into a bank to place an order for the I-bonds.  The teller has seemed clueless about how to place my order on several occasions.  And then the Treasury Direct website states that for redemptions over $1000, you have to mail the paper I-bonds to a Treasury Retail Securities Site.  You can avoid having to do this by converting the paper bonds to electronic format, but the yearly process of "you go to a bank, they mail you the bond, then you mail them the bond" is ridiculous.  These activities are the opposite of the ease that one encounters when buying something like a treasury mutual fund through a company like Fidelity or Vanguard.

I am sure that this is a very personal matter for most folks.  Everyone has a different opinion of what qualifies as a hassle.  I have been collecting I-bonds for a few years, but I am starting to realize that I would rather have the $ lumped into something that is easier to deal with and track, like a short-term treasury mutual fund.  Over the long-term (10-20 years), would the returns from I-bonds and ST treasuries be very different anyway?

I concede that the tax deferral properties of I-bonds are superior to that of other treasuries, though all treasury securities are free from state taxation.

Another point of concern is the Treasury Direct itself.  I have dealt with them on several occasions, and I would describe their reps as generally being "surly", not unlike workers at other government institutions like the Post Office.  On the other hand, the reps at Vanguard and Fidelity seem more interested in keeping me as a happy customer.  In the event of any electronic account shenanigans, I'd rather be dealing with a company than with the government.
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Pkg Man
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Re: Using I Bonds for Cash

Post by Pkg Man » Mon Dec 20, 2010 5:22 pm

Austen Heller wrote: Are I-Bonds worth bothering with?  That is, compared to other options such as Short-Term Treasuries or treasury MM funds.  The I-bond yearly purchase limit of $10,000 seems too low to be very helpful to a lot of people.  At the current rate of 0% fixed and 0.74% variable, you are probably not even keeping up with government-reported inflation, after paying taxes. 
Actually the inflation rate for I-bonds is directly from the BLS - Consumer Price Index for all Urban Consumers (CPI-U).  But you are correct, it is at this point only keeping up with inflation (pre-tax) since the fixed component is currently zero.  I still think it is worthwhile as t-bills are earning even less than inflation, and although a bit more of a hassle, it is not so much for me to avoid them. 
"Machines are gonna fail...and the system's gonna fail"
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smurff
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Re: Using I Bonds for Cash

Post by smurff » Mon Dec 20, 2010 9:18 pm

I-Bonds add a bit of diversification to a PP, plus they are simpler for some people.  If the bulk of the PP is in an IRA, for example, keeping some of the cash in I-Bonds helps maintain some tax deferral without exceeding the miniscule IRA contribution limits.  Sure, you can do this with T-Bills, but they can be a pain themselves, depending on the size of your portfolio (VP and PP) and how you acquire them.  Everything worthwhile is a pain in its own way.

I've learned since Madoff the critical importance of not putting all my "eggs" in one basket.  So for each of the four sections of the PP, I have diversified across more than one fund, more than format and one storage location, more than one whatever for each of the categories.  I include electronic vs. physical holdings in that diversification, particularly since most IRAs and 401Ks are purely electronic entries in a brokerage's computer.  Then there's that thing about counterparty risk--with I-Bonds the counterparty is the US government; with ST Treasury funds there may be several counterparties (fund company, brokerage firm, etc.)

That's where I-Bonds come into it for me.  I can see how the annoyance factor for the paper bonds--paper application made in person before a clueless teller, 12 month holding requirement, paper application to cash in before the another clueless teller-- are a real pain.  Those things help put the I-Bonds out of sight, out of mind, and hence less susceptible to being used (during an emotional crisis) to throw down for a Mercedes or Porsche.
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