Cash Cheats: Series I Bonds & Ally 5 Year CD

[moda0306]

For those interested, I know these topics have been discussed, but I've become quite fond of I bonds and my Ally 5-year CD.

For I bonds I have used the two links below to analyze several different dates and it seems that even compared to SHY they are a much more lucrative option with few drawbacks.

Most of the time, between the semiannual inflation rate (often very liberal) and the fixed interest rate, these instruments are usually paying somewhere close to what the 5-year treasury yield is paying, and that is often quite a bit higher than the yield of the bonds lower on the curve.  Since you are only required to hold them for a year, and have very limited interest penalties on redemption, they function much like a 1 year bond.  Further, they accrue interest payable on redemption that is (like treasuries) not state taxable, but it's also federally tax deferred until redemption.  If those bonds are used for education at redemption nothing is taxable.  This juices their returns even more, as annual federal taxation is one of the biggest reasons to not like cash in a liquid account.  There are limits to how much an individual can purchase, but it's worth looking into.  

http://www.treasurydirect.gov/indiv/res ... dterms.htm
http://www.treasury.gov/resource-center ... &year=2002

The 2nd piece, Ally 5-year CD's, are paying 2.4% interest now (basically the best you can do with an FDIC insured 5-year CD), but with a 60-day interest redemption penalty, making them basically like a savings account.  

Between these two, one can boost their cash yield a bit without taking on unreasonable risk.  Most people here know this... I just thought I'd shine one more light on it by giving these two options a thread of their own.  

[moda0306]

Just to stress "keeping your options open" with your money, any time someone puts their money in a tax-deferred account they are putting constraints on it.  I like the idea that I-bonds can keep more of what you have available in case of emergency, but not accruing taxes allong the way.  This allows one to keep more of their assets in taxable (read: available) accounts.  It also allows one to reprioritize where their cash goes.  There's often the question of whether you put it in your tax-deferred accounts because it yields annoyingly taxable interest, or if you keep it in your taxable portion since it usually yeilds much less return than your other assets.  I-bonds can help you make that decision a no-brainer.

If your taxable investments are made up largely of gold and I-bonds (obviously you'd have other cash too), that can leave you with quite favorable tax effects, especially during the accumulation phase when it's much easier to balance your PP by simply adding to the weakest assets.  This also leaves your two most "defensive" assets (gold and cash) as available as can be, which I think is ideal given the reason why you hold them in the first place.

[moda0306]

Wouldn't it be great to be sitting on some 3% fixed cash + the inflation portion that you bought in 2000?

Kind of a best of both worlds between LT bonds and ST bonds in some ways. I sure wish they still had the fixed interest.