Using I Bonds for Cash

[MiniB]

I do not have any experience converting paper I-bonds to electronic, but I am not sure why you would want to convert.  Personally I much prefer old-fashioned paper and only used the Treasury Direct electronic version out of necessity.

I actually bought a paper bond starting out because I wanted to use cash so I went to a local bank.  I didnt want to deposit the cash and then electronically buy one because I  fear depositing large sums of cash will cause an audit.

Once I got the paper iBond I immediately mailed it in to be converted to electronic.  I like the ability to log in and see how much money its worth with the interest, and the ability to ACH out all or part of the bond to a linked checking account.

I also wont use paper ibonds because I no longer have accounts at any banks that will cash them.  I exclusively use credit unions now, and none will touch them.  Commercial banks are so 1980 

[pplooker]

I don't have any paper savings bonds of any kind left either.

I think if I was ever rich enough to save more than five grand in I bonds a year, I'd go buy paper ones and mail them in to be converted.

The only thing I don't like about it is that TD puts the conversions in their own account.  Just list them all together, why don't they?

[Gumby]

Why do they require you to purchase the paper I-bonds to reach your 10K limit? It seems like an odd requirement when the electronic versions are easier to issue.

[pplooker]

I have never been able to figure that one out.  Maybe it's some kind of deal with the banks or something?  It seems like it'd be much more cost effective to just stop selling paper securities altogether.

Of course, good marketing would suggest that could be folly.  Many of the traditional buyers of US Savings Bonds are of a certain maturity.

[Pkg Man]

I guess I may be "of a certain maturity" since my preference would be to hold the paper bonds.  Enough of my wealth is in the form of book entries or strings of ones and zeros.  I like being able to hold the proof in my hand that I have something of value.  That may be a false notion on my part, but then again, I am of a certain maturity 

[pplooker]

Well I was mostly thinking of the grandparents who buy them for their grandchildren as being one of the prime purchasers of these instruments.

[Jan Van]

Why do they require you to purchase the paper I-bonds to reach your 10K limit? It seems like an odd requirement when the electronic versions are easier to issue.

And why do they send you the paper I-bonds when you use them for your tax return, yet they also do instant deposit into your checking account. Oh well...

[Pkg Man]

Actually I agree it is an odd requirement, but then again, we are talking about the government.

[Pkg Man]

I had a thought that I and EE bonds may carry a bit more intrinsic risk than a T-bill.  The rates are much better than T-bills, but I can't help but think that there is no free lunch, in spite of the fact that the Treasury says they are backed by the "Full Faith and Credit" of the US.  There are of course differences, such as the minimum one-year holding period, but the difference in rates seems to more than compensate for this.

If the condition of the federal government finances were so terrible that there was difficulty in rolling over the debt, is it conceivable that the Treasury might suspend redemptions on such bonds before they would default on T-bills?  This doesn't seem out of the realm of possibility as I and EE bonds are not marketable securities, and hence, would not have the same effect on the market as an outright default on regular, marketable securities.

Any thoughts?

[MediumTex]

If the condition of the federal government finances were so terrible that there was difficulty in rolling over the debt, is it conceivable that the Treasury might suspend redemptions on such bonds before they would default on T-bills?  This doesn't seem out of the realm of possibility as I and EE bonds are not marketable securities, and hence, would not have the same effect on the market as an outright default on regular, marketable securities.

Any thoughts?

It seems like the savings bond market is so small relative to the overall treasury market that such a step wouldn't make sense from a cost/benefit perspective (i.e., you would potentially be spooking the whole bond market to delay a few savings bond redemptions).

[Pkg Man]

You are probably correct MediumTex.  I was really referring to a very dire case where the bond markets are already spooked.  But I suppose if the government were strapped for cash there are a number of bigger fish to fry (Grandpa's SS check, etc).  The only reason I ask is that I will be making heavy use of them in order to keep all the LTB in a tax deferred account after moving most of my VP funds to the PP.
thanks

[Gumby]

Actually I agree it is an odd requirement, but then again, we are talking about the government.

I think I figured it out.

Consider that:

- There are $5,000 limit on both paper bonds and a $5,000 limit on electronic bonds
- When you convert paper bonds to TreasuryDirect they get transferred to a "conversion account" that's separate from your primary account.
- The Treasury is in the long process of phasing out paper bonds.

I've given this some thought, and I suspect that the computer system that keeps track of our personal limits for the paper bonds (the "old" system) and the computer system that keeps track of our personal limits for the electronic bonds (the "new" TreasuryDirect system) cannot talk to each other. In other words, if the Treasury said we could each purchase a maximum of $10,000 of I Bonds of either electronic or paper bonds, the two separate registration databases (for paper and electronic bonds) would not be able to check that each person did not exceed their personal limits. The very fact that converted paper bonds must go into a separate TreasuryDirect "conversion account" suggests that the paper registration protocol differs from the TreasuryDirect registration protocol enough to make them incompatible. I believe the paper bonds and the electronic bonds have slightly different rules in terms of co-ownership.

So, it's probably just a matter of making sure no one goes over their personal I Bond limit without having to build a system to check both paper and electronic registrations simultaneously. It was probably more cost effective for the Treasury to just let each system check the personal limits separately — especially since paper bonds are being phased out.

I think that's gotta be the reason.

[walkerjks]

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. 

[Gumby]

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.

[6 Iron]

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.

[Austen Heller]

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.

[Pkg Man]

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. 

[smurff]

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.