Using I Bonds for Cash

Discussion of the Cash portion of the Permanent Portfolio

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mbh
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Using I Bonds for Cash

Post by mbh » Mon Apr 26, 2010 5:40 pm

I'm interested in starting a new PP.  I'm starting from scratch (as far as this portfolio is concerned).   I hope to contribute approximately $40K per year.  Of the $40K in new contributions each year, about $14-16K would be new tax deferred contributions.

Given limited tax deferred space, would it be OK for the bulk of my cash contributions to go into I Bonds while I accumulate over the next 15 - 25 years?

For example, would the following first-year contributions make sense:

Cash
  $8K  I Bonds
  $2K    SHY (tax deferred)

Gold
  $8K  Physical gold (taxable)
  $2K  GLD  (tax deferred)

Stocks
  $8K   VTI (taxable)
  $2K   VTI (tax deferred)

LT Bonds
  $10K  TLT (tax deferred)

A follow-up question is how much gold, equities and cash I should keep in tax deferred for rebalancing.  For example, would 80% taxable, 20% tax deferred make sense for these asset classes?

Any advice would be appreciated.
Last edited by mbh on Mon Apr 26, 2010 5:47 pm, edited 1 time in total.
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Re: Using I Bonds for Cash

Post by fnord123 » Mon Apr 26, 2010 5:48 pm

Do you have cash put aside for emergencies (unemployment, etc.)?

If not, and you are considering using some portion of the cash part of the PP as your emergency fund, note that I-Bonds cannot be cashed until you hold them at least 12 months:
http://www.treasurydirect.gov/indiv/res ... q.htm#cash
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Re: Using I Bonds for Cash

Post by MediumTex » Mon Apr 26, 2010 5:49 pm

Do you mean I series savings bonds or TIPS?  I am a big fan of I series savings bonds for the cash piece.  I don't like TIPS at all.

I don't think there is any magic formula for tax deferred vs. non-tax deferred holdings with respect to keeping some rebalancing powder dry.  It probably makes sense (if you have room) to have a little of each asset class in a tax deferred account, though it probably also makes sense to keep the highest yielding component (presumably LT treasurys) all in a tax deferred account if possible.
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Re: Using I Bonds for Cash

Post by mbh » Mon Apr 26, 2010 7:36 pm

Thank you for your responses.

fnord123 - I have a separate emergency fund in an ING account.  I don't expect to touch any of these funds for quite some time (15-25 years).  Even so, I take your point regarding I-Bonds not being available for 12 months (and even longer if one wishes to avoid interest penalties).

MediumTex - Yes - I was referring to I series savings bonds.  If it's OK to use them for all or most of the cash component, then it certainly would allow me to "stretch" my annual contributions much further since, as you suggest, I'd probably need most of my available tax deferred space for LT Treasuries. 
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Re: Using I Bonds for Cash

Post by MediumTex » Mon Apr 26, 2010 8:48 pm

mbh wrote:
MediumTex - Yes - I was referring to I series savings bonds.   If it's OK to use them for all or most of the cash component, then it certainly would allow me to "stretch" my annual contributions much further since, as you suggest, I'd probably need most of my available tax deferred space for LT Treasuries. 
I think I-bonds are awesome.  One of the things they do is instantly expand your tax-deferred space.  People will catch on to this one day I am sure.
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Re: Using I Bonds for Cash

Post by mbh » Mon Apr 26, 2010 9:25 pm

MediumTex wrote: I think I-bonds are awesome.  One of the things they do is instantly expand your tax-deferred space.  People will catch on to this one day I am sure.
In your view, are there any limits to how far this can be taken?  Hypothetically, would you be willing to hold 100% of your cash in I-bonds during the accumulation phase?
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Re: Using I Bonds for Cash

Post by fnord123 » Mon Apr 26, 2010 9:37 pm

mbh wrote:In your view, are there any limits to how far this can be taken?  Hypothetically, would you be willing to hold 100% of your cash in I-bonds during the accumulation phase?
I-Bonds can be exchanged at any bank affiliated with the Fed for cash on demand (delta the 12 month holding requirement).  If the US were so screwed up that you could not exchange I-Bonds for cash, then I doubt a stack of $100s would be much good either.

I max out the I-Bonds both myself and my wife can buy every year.  I wish this were the old days when the yearly purchase limits were much higher!
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Re: Using I Bonds for Cash

Post by MediumTex » Mon Apr 26, 2010 11:00 pm

mbh wrote:
MediumTex wrote: I think I-bonds are awesome.  One of the things they do is instantly expand your tax-deferred space.  People will catch on to this one day I am sure.
In your view, are there any limits to how far this can be taken?  Hypothetically, would you be willing to hold 100% of your cash in I-bonds during the accumulation phase?
If I was certain that deflation was going to be with us for many years, I might question the I-bonds approach (even though you would never lose any principal), but since I think the Fed will move heaven and earth to prevent deflation I don't think a multi-year deflation is a likely event (though it's certainly not impossible).

One of the things I like about I-bonds for the cash portion of the PP is that I don't need them to reflect real inflation in order for them to work for my purposes, which is to simply provide a stable and liquid investment that seems likely to outperform CDs and t-bills.
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Re: Using I Bonds for Cash

Post by Jan Van » Sun Jun 27, 2010 11:12 am

Do y'all buy the paper version, or keep them at TreasuryDirect?
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Re: Using I Bonds for Cash

Post by Jan Van » Sun Jun 27, 2010 11:35 am

Desert wrote:Buying both types allows an individual to purchase $10,000 per year. 
Thanks for clearing that up too. I wasn't quite sure how to interpret that. So $10,000 max a year.
Wonder why they capped it. Wasn't it much higher a few years ago?

So I can almost see I-Bonds as sort of a little bond IRA, correct?
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Re: Using I Bonds for Cash

Post by jhigh » Fri Jul 23, 2010 4:51 pm

When purchrashing I-Bonds for the kids, does it make sense to make myself the beneficiary and not the co-owner, so that the income will be taxed at their tax rate and not mine when the bonds are redeemed?

I realize that I-Bonds held in the child's name do not qualify for education tax exclusion, but they would still provide a way to legally work-around the 20K annual limit (10K each for myself and spouse) for the cash portion of the PP.  Does this sound reasonable?

Edit
One more question  ;D - does anyone have any experience with the SmartExchange process to convert paper I-Bonds to electronic?  Does it makes sense to do this and if so, does the conversion of paper bonds count against the annual electronic limit?
Last edited by jhigh on Fri Jul 23, 2010 4:59 pm, edited 1 time in total.
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Re: Using I Bonds for Cash

Post by Pkg Man » Fri Jul 23, 2010 6:27 pm

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.
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Re: Using I Bonds for Cash

Post by MiniB » Fri Sep 10, 2010 6:52 pm

Pkg Man wrote: 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  :D
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Re: Using I Bonds for Cash

Post by pplooker » Sat Sep 11, 2010 5:32 pm

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?
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Re: Using I Bonds for Cash

Post by Gumby » Sun Sep 19, 2010 6:34 am

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.
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Re: Using I Bonds for Cash

Post by pplooker » Wed Sep 22, 2010 7:49 pm

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.
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Re: Using I Bonds for Cash

Post by Pkg Man » Wed Sep 22, 2010 8:19 pm

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  :)
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Re: Using I Bonds for Cash

Post by pplooker » Wed Sep 22, 2010 8:57 pm

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

Post by Jan Van » Thu Sep 23, 2010 7:17 am

Gumby wrote: 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...
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Re: Using I Bonds for Cash

Post by Pkg Man » Thu Sep 23, 2010 6:35 pm

Actually I agree it is an odd requirement, but then again, we are talking about the government.
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Re: Using I Bonds for Cash

Post by Pkg Man » Mon Sep 27, 2010 7:43 pm

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?
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Re: Using I Bonds for Cash

Post by MediumTex » Tue Sep 28, 2010 8:54 am

Pkg Man wrote: 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).
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Re: Using I Bonds for Cash

Post by Pkg Man » Tue Sep 28, 2010 10:06 pm

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.
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Re: Using I Bonds for Cash

Post by Gumby » Tue Sep 28, 2010 10:39 pm

Pkg Man wrote: 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.
Last edited by Gumby on Tue Sep 28, 2010 10:51 pm, edited 1 time in total.
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Re: Using I Bonds for Cash

Post by walkerjks » Tue Oct 26, 2010 8:18 am

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. 
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