TIPS vs I Bonds--What's the Best Way to Hedge Against Inflation?
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- Опубліковано 26 вер 2024
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TIPS (Treasury Inflation Protected Securities) and I Bonds both protect investors against unexpected inflation. Both bonds are also issued by the U.S. Government and are exempt from state and local taxes. But that's about where the similarities end.
There are key differences between TIPS and I Bonds that investors should know. We look at 8 key differences, along with the pros and cons of adding each to your portfolio.
As a bonus, we look at how one of them can help you save for a child's education.
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While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I'm the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.
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Thank you for the detailed explanation including the actual charts at T-Direct. I just looked up the recent inflation rate on an I-Bond online and effective Nov 1st, it is 7.12% for the next 6 months. Not bad! Savings rates are basically zero.
I've had I bonds for almost 20 years & yes, its getting 7.12 %, but I also got 0% sometimes!
The $20k per couple/per year limit isn’t an insurmountable problem, over the years my wife and I have accumulated a nice six figure holding.
They’re great for a deep energy fund and acting a portion of your bond allocation to free up Roth/tIRA space for more stocks.
@@rongendron8705 20 yrs ago the fixed rate was 3%, so you at least got that, like I get. I could not find any year where the variable was zero. Run the manifest at TD subtract the current adj rate and what is left is your fixed rate.
@@rongendron8705 Me too! I guess in the long run it does pay off.
Is there an option for the interest to compound in the ibond?
I Bonds can be a good way for an individual or married couple to manage some cash in retirement if they build up the balance in I Bonds over the years (particularly prior to retirement.) Once you have some I Bonds that are held for 5+ years, you're earning inflation-adjusted interest and can draw them down whenever needed at no penalty. Right now you are earning almost 8 times more interest in an I Bond versus a "high yield" savings account. If you make quarterly estimated tax payments, I suppose you could overpay by $1250 each quarter per taxpayer and then convert the tax refund into I Bonds to purchase the additional $5K annually per person. If done each year for 5 years, you would have $75K in I bonds for an individual or $150K per couple, with a portion of those bonds eligible for sale at no penalty. The minimums are modest, so you don't have to buy the entire $10k if that is not in your budget. You have to plan ahead to accomplish this, based on calendar year. Don't wait for the last week of the year to do this, as it can take a few days to get your account set up and the I Bond purchased.
Does the min 1 or 5 year hold rule apply to each individual deposit?
@@dumbness-or-kindness As far as I can tell, yes. Each purchase is a new bond with its own issue date: the first day the month in which it was purchased.
Exactly...I Bonds are a great way for a pre-retiree to build up their cash bucket going into retirement and by purchasing them every year heading into retirement you build a bond ladder cash bucket to draw on. Pat...it's nice to see someone else besides me pounding the table for I Bonds for pre-retirees....it's my 5 to 10 year plan to build my cash bucket heading into retirement in 5 or 6 years. I go as far to say for those age 59 1/2 or older to to IRA to I Bond conversions to de-risk your portfolio. You are basically doing a hybrid Roth/IRA conversion as you pay taxes like you would on the IRA withdraw and then you never pay taxes on the principal ever again, and the conversion is like an IRA in that the I Bond interest is tax deferred until redemption.
I know very little about finances, but I've been looking for a way to keep a "savings account/emergency fund" that will hedge against this crazy inflation. The value of the cash under my mattress or the money sitting in my checking account is wasting away. I Bonds seem to be the a great answer for me. Thanks for the video.
Tax deferment on I Bonds is huge! This makes I Bonds effectively an IRA - you get tax-free compounding. I am committing to buying 10K worth of I Bonds per year and I am looking into overpaying my taxes so I get the extra 5K worth of I Bonds.
Keep in mind you will be taxed on the compound gains when they're eventually sold. A Roth IRA won't be taxed at all.
But then you pay your Marginal Tax rate on all deferred taxes. You can earn up to $52k/ year in Qualified dividends or from Long-term Capital gains in a Taxable account and only ever pay 15 amd 20% at much higher amounts.
Thanks, Rob. Great video. I invested very little into I-bonds. It's not really for me. I can see why people buy them, though. There are some benefits. This helped me understand TIPS as I didn't really understand how they worked. I'm a nurse and I picking a lot of overtime so that I can invest as much as possible into my portfolio. Learning about all these strategies is so interesting. Thanks again.
Thanks for the video! I bonds are unknown to many, but good option at 7.12% right now, with inflation on the rise.
These I series Savings Bonds would be a great investment but you're limited to $10K per year.
I agree, the possibility of a negative rate on a TIP makes them a no-go.
THEY SHOULD TEACH THIS STUFF IN HIGH SCHOOL!
sorry for all caps.
So true! I am actually a high school senior who is pissed off about this!
Can you comment on the upcoming 10 year TIPS auction? What is the expected rate and how does it compare versus buying an I bond?
I trust everyone is hedged. I cap out a 403b 457 and a 401k and both IRA ROths, and give all my kids and myself 10k a year Ibonds and who cares. i just want to make sure.
It's wild how much things have changed since the video was posted. Now the ai bond 7.1 going to go higher in May, due inflation hitting 8.5% currently.
Buy now before May 1st. Get the 7.1 and the 9.6 rates for a blended rate for 1 year at around 8.50%.
@@ronloftis9080 I am waiting for the hardback my usatreasury account to be cleared then I can start buying them. I had to mail in a notarized form to prove my identity.
From what I understand, the 3 month penalty could actually be for an amount of $0 if the current 6 month rate of the I-bond is 0.0% at the time the bond is redeemed.
I understand that the new rates for I Bonds are at 7.1%! Great video and tips!
the current rate is 7.12% for purchases through April 30th. The new rate for purchases in May should be 9.6% or so. Buy now...get the 7.12% for 6 months, and then in Oct you will get the 9.60% rate for the following six months. It's a no brainer investment.
@@ronloftis9080 Thanks Ron!
Great info.. thanks.. Subscribed.
Can you do an video on Indexed annuities?.. Are they good?..
you called this one. great video. keep it up!
I was interested in TIPS (SCHP) until I found out about the tax implications haha
thank u. Very useful information.
Question? what about SCHP?
Hi Rob! I’m watching this now in May of 2022 and can’t thank you enough for your fantastic explanation between these two options and helping me protect my assets!
Thank you so much. Mr Rob
I suspect you maxed out your I bond limits for both of you this year and will again got next year given the huge increase in CPI. Thanks for the video.
Good video and explanation thank you!
I've never bought I bonds. It looks like the only place you can buy them is through treasury direct.... Anyone ever have a problem getting their money back after their investment is matured?
Nope
Update: May 2022 I Bonds yield 9.6% - huge!
What are the advantages of individual TIP bonds vs TIP ETFs?
Excellent question. I am no expert but one big difference is that if you buy an individual TIPS and hold it to maturity you get at least the face value plus interest and inflation adjustments when it matures. The value would fluxuate with changes in interest rates if you sold it before maturity, being worth more if interest rates dropped and less if interest rates went up But if you hold it to maturity it does not matter .
With a TIPS fund, they are going to hold their bonds until maturity, but the value of your shares will fluxuate with changes in interest rates just like any other bond fund, so the price may be up or down when you want to sell them.
So it seems to be that buying individual bonds is the better choice if you aren't going to need the money before the bond matures.
But do not listen to me.
I Bonds - principal is guaranteed. TIPS - not so. I Bonds 1 year min holding period and then a 3 months last interest penalty if redeemed between year 1 and year 5. TIPs you would have to sell in the secondary market and you would be offered current market value.
Thanks, excellent video
With respect to using you tax refund to buy I-Bonds, if you have enough of a refund due, does each spouse get to buy the additional $5,000 worth of I-Bonds or is it $5,000 per joint tax return?
So, how do you make any money with ibonds prior to their mature date? - the GOV will only give you what you paid for them correct? - I don't have 30 years to wait, but I could wait 5
? You would have made all the interest up until you pull it out. If you pull them out after 5 years there is no penalty. Within 5 years you're penalized 3 months of interest it earned. Within 1 year you cannot cash in the bond.
great stuff... bonds are a new thing for me (lots of us now ) Is the iBond rate an APY ? its called "Interest Rate" on the site but it compounds each 6 months...meaning its reinvested I assume, so the APY is Higher than 6.89 % . What say you ?
Regards
Great video. Very informative.
Excellent video. Appreciate your work 💪🏽
Can you add a beneficiary on an I Bond?
Rob, mirror or upload your vids to Rumble. Extend your reach, maybe make some more cash? Be great to have access to your channel there too.
How is the typical interest in I-bond when inflation is 2% (typically the case)
For I-bonds, if both the fixed rate and the inflation rate go negative, will the composite rate be floored at zero?
Afaik, yes
@@adeshshetty2830 yes they are guaranteed to never go negative on a total return basis
@Rob - can I use my I Bonds to pay for my grandchildren's education without taxation?
Thank you!
Hello Rob. I enjoy your videos, very informative and believe it or not, I’m actually learning from them. So question for you, I invested some money on a fidelity tips- Fipdx instead of vtip from vanguard. The reason was because vanguard yield is negative -2.41. Fidelity is +7.11 which seems hard to believe. Any thoughts on it will greatly appreciated. Thanks
What's the ticker of the Fidelity fund? I can tell you that if it's a TIPS fund, there's no way its yield is 7%. It may have had a 7% gain over a period of time when rates fell, however.
@@rob_berger fipdx is the ticker
Fidelity® Inflation-Protected Bond Index Fund
Fipdx Fidelity® Inflation-Protected Bond Index Fund
According to Morningstar its yield over the past 12 months is 0.06%--www.morningstar.com/funds/xnas/fipdx/quote
Hi Regarding the 3 month interest penalty if I sell i bonds within 5 years, how is the 3 month penalty calculated, since rates change every 6 months? Is it based on average monthly interest over the duration of the holding period? Or last 3 months of interest before sale?
What is your opinion of ibond interest rates now?
Will the I bond interest be automatically converted to I Bond principal when delivered each 6 month and earn compound interest or it will be cash in my account not compound interest? If it does get converted to principal and compound, does it count towards the annual purchase limit of $10K? Thanks.
Hey Rob. Presently the I bond is paying 7.12. Many think it will go to 9 something. Just reviewed your video on the subject. Any updates?
Jon, I just stumbled into Berger via search on I-Bond vs TIPS (dunno how often he answers comments on old videos). I noticed he has a video on I-Bonds released on Apr 13, 2022. You may want check that one.
Thank you Rob for your informative video on I-Bonds and how they work. I would like to invest in them but have one question regarding the beneficiary status of these bonds. You mention that the I-Bond must be held for a minimum of 1 year before it is eligible for redemption. Does this requirement apply to the beneficiary of the I-Bond?
The one year applied to the bond, holder makes no difference. If the beneficiary is spouse, simplest thing is to list as co-owner, like you would the house. If passed on in will, then yes it applies to beneficiary too
can foreigner buy ibond? if yes how? the asking social security number
www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ibuy.htm#who
What is the best choice/vehicle to hedge against market correction, down turn in equities? Or what a non correlated investment to equities?
I recently read an interesting analysis on the 2020 crash (got the PDF from Morningstar - 2021 Diversification Landscape
A look at how key asset classes performed in 2020, how correlations have changed, and the implications for portfolio building), which focused on the performance correlation between different vectors, asset classes, factors, sectors etc during the decline. The key lessons - simple strategies worked best like adding Cash, Treasuries and Gold (best diversifiers). Utilities were also an option with the least/only 0.6 correlation amongst equities. However all classical options such as commodities,
corporate bonds, global bonds, high yield, REITs, and Treasury Inflation-Protected Securities have lost value as diversifiers (correlation to other assets crept up). Specifically, the past 20
years have been marked by declining interest rates and benign inflation. In a period of equity market weakness precipitated by rising yields, Treasuries and other high-quality bonds may be less reliable diversifiers, particularly given how low their yields are in absolute terms. On another perspective from the defensive framework by the WisdomTree team, you can still preserve value by relying on equity defensive sectors such as Healthcare and Consumer Staples. WisdomTree also put strong emphasis on and according to their analysis vehicles such as Momentum and Quality ETFs are overperforming in decline. Last but not least, there is also the negative correlation between long term growth/return and stability/defense to be considered. Personally, I am currently most concerned what bonds to include, if any.
www.morningstar.com/content/dam/marketing/shared/pdfs/Research/Diversification_Landscape_033021v2.pdf
the best hedge is physical PM's. Physical silver went UP slightly during the time equities along with crypto was going to crash to zero just last year...
How does the fixed rate get set on IBonds? Is there a chart of past fixed rate on Ibonds?
do a search for I Bond Rate Chart and it will come up. Lately the fixed rate has been zero, since May 2020. The inflation rate changes every May 1st and November 1st. Your I Bonds change rate their composite rate on a 6-month rolling basis from the date of issue.
With I bonds, do you receive interest every 6 months or does it compound/add to the bond?
The interest accrues (compounded monthly I believe), but i bonds don't pay any interest until you redeem it or it matures.
Thank you Rob. As always a well thought out and presented bit of information. I think I'm going to purchase I-bonds this year and then consider purchasing each year moving forward.
Great demonstration. I will purchase I-bond ...currently pays almost 10% (May 2022). Glad to know that it I-bond won't go negative.
My entire Emergency Fund is invested in I-Bonds. Since they are tied to a checking account, there is little issue with liquidating them.
Does the interest post to your checking account every 6 months?
Exactly!
@@wilma6235 No. You get that info. directly from the TD website, (your account)
What does that mean? .... "tied to a checking account?" I thought the I-bonds were held at the government at Treasury direct. Confused
@@wannamontana4130 You have to purchase I Bonds from a checking account online. Thus the funds return to the checking account when liquidated.
Excellent video! Thank you.
My comments on Stocks... I buy on the Dip... and typically hold for a very long time. I buy more Stocks with the Dividend's, so I am constantly "Compounding"...
Great explanation Rob! Plain and clear as usual. Now I seem to understand the specifics
Is there an option for the interest compound in the ibond ?