David Maymudes: ‘I just noticed that the online bond purchase limit is now $5000, up from $1000.’

☞ Indeed it is. Which means that to buy the $30,000 annual limit, if you wanted and could afford to, you’d need to visit the web site just six times, not thirty. (Likewise for your spouse.) And, yes, you still get frequent-flyer miles (or whatever your credit card gives) for buying them, because they are considered ‘merchandise’ not a cash advance. The annual $30,000 purchase limit Click here to check them out. But for heaven’s sake don’t buy any if you’d have to pay interest on your credit card for doing so.

The interest they pay is still peanuts – inflation-plus-2%. (For a retirement account, you would call your broker and buy TIPS instead, which yield a bit more.) But at least it can be sheltered from tax until withdrawal . . . is never subject to local income tax . . . could be entirely tax-free if used to pay tuition . . . and can never be negative, even if we have deflation. So for more or less complete protection against inflation, deflation and depression, I-Bonds could be a place to park some of your money, especially if you’re older.

Remember:

  • Series I Savings Bonds are dated the 1st of the month of purchase, and earn interest from that date (so buying late in the month makes sense — you get three or four weeks’ free ride).
  • They can’t be redeemed until the bonds are six months old.
  • If they are redeemed before they are 5 years old, the last 3 months of interest is lost. But at today’s rates, losing 3 months’ interest is hardly a big deal.
  • They stop earning interest after 30 years.
  • The interest is accrued monthly (compounded semi-annually), and you can, if you wish, elect to pay taxes on the growth without waiting for redemption. That could make sense for bonds in the name of a child in a low tax bracket. Little or no tax would be due each year; and, by satisfying the tax man on a pay-as-you-go basis, no tax would be due at redemption.
  • These are such a terrific deal that the government limits calendar year purchases to $30,000 for each Social Security number. If you’ve got much more to invest, you might want to take another look at TIPS, which are currently promising over 3% plus inflation (but with that rotten tax to pay each year on the inflation adjustment, even though you don’t receive it).

A small additional advantage for seniors:

Seniors are required to pay taxes on up to 85% of their Social Security benefits if their “provisional income” exceeds certain amounts. Many have learned to their annoyance that tax-exempt municipal bond interest is included in calculating provisional income, and can thus bump up the taxable portion of the Social Security benefit. Savings Bond interest, however, is NOT included in provisional income until you actually redeem the bonds (unless you elected the pay-as-you-go approach mentioned above).

A possible advantage for tuition payers:

Normally, the tax on Savings Bond interest is deferred as it accrues, taxable in full when you redeem the bonds. But if someone at least 24 years of age buys a Savings Bond and then, years later, spends the proceeds upon redemption for college tuition, fees, and books (personally or for a dependent), the interest can be entirely exempt from taxation.  Unfortunately, the exemption is phased out for higher income taxpayers, and there are several confusing restrictions, so you’d better check the rules carefully if you’re really counting on this one. Note that you CANNOT hold the bonds in the name of the child and get this benefit (the owner, remember, must be at least 24 on the date of purchase). By the way, if you redeem savings bonds and put the proceeds into a 529 qualified state tuition plan, that is considered a qualified higher education cost itself and will exempt the interest on the bonds from taxation if the other requirements are satisfied.

 

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