Friday Reading: Paper I Bonds Arrived

By Harry Sit

I have some good news to report. Back in January I bought the maximum amount of I Bonds I’m allowed to buy at TreasuryDirect — $10,000 each for me and for my wife. Because I Bonds are paying more than other comparable safe investments, I want more. I used the backdoor to paper savings bonds and it worked!

I paid extra with a tax extension. Then I allocated $5,000 from my tax refund to savings bonds. I received $5,000 paper I Bonds about four weeks later. Sweet! Here’s the proof:

If you haven’t bought your quota of I Bonds at TreasuryDirect, this month is the last chance to get the 3.06% rate for the first six months. If you buy in May the rate will be 2.2%.

I have another piece of good news. After pausing for over a year, Frank made a new post to his blog Bad Money Advice: Are Timeshares a Good Idea? Although the answer is obvious, I’m still glad to see Frank’s return to blogging. I hope he’s not just teasing us.

*****

A reader asked Mike at Oblivious Investor How Much Do I Need to Save Per Year? Surprisingly such a simple question has no clear answer. There is no answer because there are simply too many unknowns. How will one’s income grow over the years? What invest returns will the market deliver? No one knows, but we still need to make a decision on how much to save today.

The old rule from The Richest Man in Babylon said save 10% of your income. That was when interest rates were high. My answer would be: save 15%; invest well; be flexible and live with whatever you end up having.

*****

Scott Burns at AssetBuilder wrote Reverse Mortgages: Their Time Has Come. I agree. A reverse mortgage can be thought of as selling the home and using the proceeds to buy an annuity plus a call option on residential real estate. If the real estate value increases more than projected, there can be excess value left at death. If the value doesn’t go up as much, the bank can’t come after you for the difference. However, in many cases, I think selling outright and buying a life annuity would be more straightforward than a reverse mortgage, especially when the home is larger than what the retirees need.

*****

I Bonds are now a free lunch for everyone because the rate can’t go below inflation. White Coat Investor tell us about another free lunch in The G Fund, a Free Lunch. This G Fund free lunch is only limited to federal government employees and members of the military.

You know what they say about free lunches. There aren’t free lunches. In I Bonds, taxpayers who don’t buy I Bonds are paying for the extra interest, although they are free to buy I Bonds if you they want to. In the G Fund, other taxpayers who aren’t allowed to invest in the G Fund are paying for it. If you have access to a free lunch, enjoy!

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Posted on April 20, 2012 under News. Keywords: , , , .

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Comments

12 Comments on Friday Reading: Paper I Bonds Arrived

  1. nickel on April 20, 2012
     

    Did you get the weird combination of multiple denominations, or did you get a single $5k bond? I ended up owing this year, so I requested an extension and made an overpayment. I’ll be filing in a week or so and requesting the refund as I Bonds.

  2. Maggie on April 20, 2012
     

    Quick question as I’m new to I Bonds– if I bought an electronic I Bond, is there some sort of secondary market where I could sell it if I needed the money before the one-year minimum time period for redemption?

    Thank you for your help!

  3. TFB on April 20, 2012
     

    @nickel – Yes, they will give the first $250 in $50 bonds and then the rest in the least number of bonds. So for $5,000 you will always get 4 $1,000 bonds, 1 $500 bond, 1 $200 bond, and 6 $50 bonds.

    @Maggie – No secondary market. There is no way to sell within the first year (or 11 months if you buy toward the end of a month).

  4. dd on April 20, 2012
     

    Does anyone know if the I Bonds bought through a tax refund this month will have the current rate or the new rate that starts in May?

  5. TFB on April 20, 2012
     

    It depends on the date printed on your bonds. The one I showed above has the April 2012 date, which means it will have the current 3.06% rate for six months before moving to the 2.21% rate for the next six months. I filed in mid-March. If you haven’t got your bonds yet, it all depends on how soon the IRS processes your return and how soon the Federal Reserve bank processes the I Bonds order forwarded by the IRS.

  6. skatesailor on April 21, 2012
     

    Dear Buff:

    If you filed your tax return in March, why did you need, and how did you use, a tax extension to buy I-bonds? Would this tactic for buying I-bonds have failed without a tax extension?

    Thanks.

  7. TFB on April 21, 2012
     

    It’s outlined in the previous post Backdoor to Paper Savings Bonds. I needed a tax extension because it gave me a chance to pay more toward my 2011 tax, which increased my 2011 tax refund to above $5,000. If your refund is already above $5,000, you don’t need a tax extension. Paying estimated tax with Form 1040-ES is another way to increase the tax refund but you have to make sure the payment is credited to 2011, not 2012. Withholding more during the year is yet another way but you are out the money for a longer period of time.

  8. LouisC on April 21, 2012
     

    Ok, please help me with the math. You gave Uncle Sam an interest free loan by overpaying income taxes so you could buy more I bonds than the $10K annual limit, but you only bought $5K more. Why not overpay income taxes by $20K, 50K, or 100K? How long does it take to break even on that interest free loan? Would you be into the next year by then? If yes, then you have $10K to buy more without giving away interest to do so. What am I missing?

  9. TFB on April 21, 2012
     

    LouisC – What are you missing? The math. The maximum amount in I Bonds you can buy with tax refund is $5,000. That’s the interest free loan you give. You can’t overpay income taxes by $20K, 50K, or 100K because you can’t get that much in I Bonds from tax refund anyway.

    Interest free loan: $5,000 for 2 months (it would otherwise earn 1% APY in a savings account)
    Lost interest: 5,000 * 1% / 12 * 2 = $8.33
    I Bonds rate @ 3.06% APY over 1% APY saving account: 2.06% per year, or 0.16% per month for the first six months
    Time to breakeven: $8.33 / ($5,000 * 0.16%) = 1 month

    Just within the first six months, you break even after the first month. The other five months are gravy. More gravy in the following six months. When I Bonds stop paying more than a savings account, you sell.

  10. Barbara Friedberg on April 22, 2012
     

    What a brilliant idea about the “backdoor” on I bonds. I bought the full allotment for my spouse and I, I wish I had thought of sending Uncle Sam a bit more before the deadline!!

    Well, I guess there is the TIPS auction in July.

  11. David C on April 23, 2012
     

    I’m just glad you received your paper bonds. I remember there were some boglehead posts claiming they were denied their paper bonds despite having properly filed tax returns… I’m not sure if those problems were ever sorted out or not.

    Oh well, the important thing is that we received our bonds… and Frank has a new blog post :-) .

  12. Mike on April 24, 2012
     

    If you want more I bonds you could get another 10K I-bonds in your trust if you open a treasury direct account in the name of your trust. That’s 35K / year total I bonds you can buy, not too shabby.

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