Well, I was planning to pay annually, but you summarily talked me out of it. I would have started a nightmare of recordkeeping that i may have regretted. THANK YOU for making this video!
I keep coming back to watch this video again during tax season since I am reporting I-bond interest yearly instead of at maturity. Thanks for the clear concise explanation as usual.
Thank you for the video - clear and easy to follow. For people on Medicare, or who will be on Medicare when a redemption is made, a redemption may trigger extra Medicare tax. They should consider the impacts of lump sum interest and what that does to their Modified Adjusted Gross Income. If you are close to an IRMAA bracket (Medicare Tax brackets) and the redemption pushes you into the next bracket the tax increase is incremental. For the first bracket going $1 into the bracket will cost a couple about $2000 a year in extra Medicare premiums (tax). Assuming 5% interest for 20 years a $10,000 I bond will have generated about $16,000 in interest, 3% would be about $8K interest.
12:20 Thanks to supersaver Steve for pointing this out: If you are already paying taxes annually on Series EE or E interest earned, you will need to use the same methodology for your I-Bonds. -------- Thanks for visiting our personal finance channel! We hope this free content will help fast-track your financial journey! Everyone's financial journey is different. Please note that there are questions/ comments which I will not be able to answer without fully understanding your financial, personal & other circumstances. WATCH NEXT: ⭐ How To Download Your 1099 From TreasuryDirect: th-cam.com/video/FTKR14Td1Og/w-d-xo.html ⭐ May I-Bond Fixed Rate Expectations: th-cam.com/video/6jYeFdwUua4/w-d-xo.html ⭐ I-Bond Interest Formula: th-cam.com/video/9hfHoSijJEk/w-d-xo.html ⭐ 5% 11-Month Capital One CD: th-cam.com/video/Gd_CQ9QNCDE/w-d-xo.html ⭐ 5% 27-Month Sallie Mae CD: th-cam.com/video/GcWXCh3vjNM/w-d-xo.html ⭐ TIPS vs I-Bonds 2023: th-cam.com/video/JKbvtdcsPSM/w-d-xo.html
Thanks for doing the heavy lifting on this subject! I'm going to listen to this again and give it undivided attention. I can't thank you enough for all your quirky, fun and informative videos you put out! What a gift! Thank you so much and looking forward to your next nugget of info!
Thanks for this video Jennifer! Seems to me that paying at redemption or maturity is the clear winner. Not only is it far less complicated, you also don't have to dip into other funds to pay the taxes along the way (funds that could themselves be growing in value in the stock market and whatnot). Even if it was no less complex, seems like paying every year is worse just from an opportunity cost standpoint.
Well actually in my case I had a large tax credit in couple of years about when I bought an electric car. So to take advantage of the tax credit as much as possible, I chose to report the interest on the I-Bond yearly so that I would not have to pay tax on the interest for that year! It's not that difficult to track if you have only one I-Bond.
I just love your videos. While I am moderately sophisicated investor, I learn from every single one or your presentations. Your explanations of everything you do are stellar. Thank you!
This is everything I needed to know about taxes on I-bonds, thank you so much! I came here with the desire to pay the tax annually simply to spread that cost out over several years, rather than one big bill at the end, but with the complication involved, I'll just wait until the end.
Time to setup a spreadsheet! 2022 was my first investment in I-bonds. Retired and low taxable income, I pay no federal income tax annually. But if I wait, I might. It's worth it to me.
IMPORTANT QUESTION: Suppose you bought iBonds in January 2022 and want to pay future taxes on interest yearly. For tax year 2022, you would declare on your tax return 8 months of interest (Feb 1 thru Sep 1) since there is a 3-month penalty (Oct 1 thru Dec 1) for selling before 5 years, right? But how do things carry over to the following tax year (2024)--what happens to the 3 months' penalty interest at the end of 2023 (does it carry over to tax year 2024 even though it was earned for tax year 2023)?
I suppose a simpler way to ask this question is as follows...I think I understand how to declare the interest in tax year 2022 (withholding 3 months of penalty interest), but assuming I continue to hold all the way through 2023, what should be declared for tax year 2023 (keeping in mind there is still a 3-month interest penalty)?
A top advantage of reporting at redemption is if you expect your child to be in college at that time, the interest on redeemed US Savings Bonds will be exempt from federal taxes, if you use those proceeds to pay college tuition. So if you have a 13-year-old child, now could be a perfect moment to start making annual bond purchases that you'll redeem in five years.
Thanks for sharing. If you're planning on doing this, make sure you understand the requirements to do so: www.treasurydirect.gov/savings-bonds/tax-information-ee-i-bonds/using-bonds-for-higher-education/
It makes sense to wait until redemption, especially if you plan to cash the I Bonds out in retirement. My understanding is that we'd then be in a lower tax bracket, so the burden would be less. I agree with you that paying tax on the interest annually looks like a huge headache.
Im paying taxes on I- bonds at redemption or maturity. I started buying I-bonds in 2000. Not looking forward to paying the taxes on those as they will be in a top bracket. but the recording seemed like a nightmare. I'm grateful for the tax deferred compound interest.
@@vivisimonvi last year combined rate was 13.39%, The $10,000. I-Bonds are now worth $40,000. and you could buy $30,000 paper and $30,000 e-bonds for a combined $60,000. per year. And you could also gift I-bonds.
@@robertryan3490 Not complaining, I'm retired , truly blessed to be paying higher taxes in retirement.Worked construction my whole life. Did without many things and toys, put 2 kids through college with no loans.Started investing small amounts in stocks when I was 18 . I was an unusual kid.
I did this years ago with EE bonds when I was a student. I had a bunch of bonds that had been gifted to be, that were in my name (so they weren't eligible for the education exemption), and realized in advance that if I redeemed them all at once to partially pay for grad school I'd be hit with a large tax bill (both because of the interest amount as well as the fact that I had started working part time), so I switched to the annual payment method a couple of years before I needed to redeem them. I did get hit with a small tax bill that first year, but it was much less than if I had waited. And yes, I was very much a tax nerd even as a student. Also, while I totally agree that there is a bit of recordkeeping involved that can seem overwhelming, the easiest way I found to do this is to set up a spreadsheet where each row is an individual bond (the first columns can even include info like serial number for paper bonds, issue date, etc.), and then each data column is where you record the end of year value. You add a column every year with the new value, and then it becomes easy to calculate interest earned in any given year. Yes, you still have to spend the time looking up each bond's values, but at least it all gets saved in a easy-to-reference grid so you only ever have to do that once for any given year.
At redemption. No question. Two reasons. First, and you highlighted this, is the complexity of keeping track of an ever-increasing number of I-Bonds over an ever-increasing span of time. The spreadsheet you will need to create, and then relearn every year, will grow at x^3. It becomes a job in of itself. Besides, try explaining it to your surviving spouse after you've kicked the bucket. Yeah, not going to happen. Second reason is we intend to live like paupers, which means we'll be in a lower tax bracket. Happy investing! 🙂
At redemption. Simpler and tax deferred interest allows for more, albeit small, investments. Thank you for your easy to understand explanations on fixed income.
I have bought I-Bonds over the last year and a half. I will wait until redemption to pay taxes because luckily for me I am retiring in a year and will be in a lower tax bracket. So if you are close to retirement this may benefit you as well.
Jennifer, your videos are well done and informative. You're a good educator! Thanks again ps… im waiting until redemption to report my Ibond interest income. easier for me
Jennifer, great video, as usual. Personally I will be paying my taxes on the interest earned on I Bonds when they are redeemed. For what it’s worth, you can put (federal) backup withholding on your TreasuryDirect account so when the bonds are redeemed or when they mature, taxes will be withheld automatically. It’s not a perfect option, but a lot easier than paying taxes each year.
I was hopeful that you would produce a video on this topic. Excellent video. Thorough, detailed and factually accurate. In my situation, I have chosen to pay tax on the interest now. I am retired and the reason I made this choice was (1) that the individual income tax rates enacted by the Tax Cuts and Jobs Act will sunset in 2025 and who knows if the rates will revert to 2017 levels or what new rates will be legislated in 2026 given the current financial climate. (2) My income will increase in the future with upcoming RMD's from IRA's which could involve moving my marginal tax rate to the next level. (3) My main intent with the I Bond purchase (other than the attractive yield), was to create an asset that I could choose to use at some later time or pass to my children. Paying tax on the interest now would essentially make inherited I Bonds tax free for the recipient. The recordkeeping is something I already do so that is not an issue for me. Anyway, those were the main factors that affected my decision to report the interest income as I earn it. Keep the great videos coming.
Terry, like you I'm 20 years into i-bonds, 10 years left till maturity. Can we pay accumulated interest now, rather than wait for maturity (taxes lower & rmds not an issue yet)...Jennifer didn't address that option.
@@keith8325 I believe that what was presented in the video is accurate in that you essentially make the election when you first purchase the bonds. If you don't elect to report "accrue" the interest annually when first purchased you, as a cash basis taxpayer, are "deemed" to have elected to report the interest at redemption when you receive it. To change methods after the initial year of purchase you would have to file and have approved a change in method of accounting. Once again, I think this was covered in the latter portion of the video. Hope this helps. TT
@@terrythurman6899 Publication 550 states (page 7) that you can switch from the "accrue" method to the annual payment method without permission at any time, as long as you report all interest accrued to-date and pay taxes on that interest when you do so. It's switching back to the "accrue" method that requires IRS approval (which normally is automatically granted, but does require the affirmative step of asking). In other words, it's a one way street. You can switch *to* paying taxes on interest annually any time you'd like (it's kind of like a Roth conversion--you need to pay taxes on the total gain in value to-date, but then you don't pay taxes on that value again), but switching back to paying upon redemption requires jumping through a few hoops.
For those doing annually, be aware that relatives often bought EE or I bonds in kids names and held onto them. We had that happen for several generations and would have been in trouble if we had been reporting annually. Additional Treasury Direct holds back reporting the last three months interest until you hit the five year mark, but I haven't found anywhere that states you definitely don't have to accrue that interest. Video doesn't accrue the interest, but not sure either way what IRS would demand.
Latest data indicates it's unlikely I-Bond rates are going down in May. So glad I got in and bought $10k worth in the fall of 2021 and spring of 2022. Making great interest!
Thank you for all the wonderful information that I have received from your videos! I have learned so much great information from you and feel a lot more confident than I ever have felt in a long time!
QUESTION: I purchased my first 10K of I-bonds in August 2022. I have chosen to pay the taxes annually. Am I permitted to pay tax on all five months of interest or must I exclude the three month early withdrawl penalty? I would like to claim as much interest as possible. I took early retirement in 2021 and will be at lower tax bracket for only a few years. I will revert to a higher tax bracket once I start collecting Social Security in 2027. YOUR VIDEOS ARE EXCELLENT. Thank you for all your knowledge!
I'll go with redemption. Too complicated otherwise. Why does the actual interest % figured out on t bills after auction come out lower than the posted interest % ?
Just for fun, I played with some numbers on the TD calculator. If you bought the first $10,000 I-Bond in August of 1998, it would be worth $40,748 today ($39,888 by the end of 2022). The value would have been $36,060 by the end of 2021. You would be reporting $3828 in earned interest (income) just for that single I-Bond in 2022 and paying taxes before maturity. To be fair, rates were probably at their peak for that year as well.
Replying to my own comment instead of an edit but the fixed rates attached to these early bonds (~3%) really helped with growth overall. The same figures don't look so great when the fixed rates started dropping to around 1% and below starting from May in 2003 on onward. For reference, an I-Bond purchased in May of that year would be worth slightly over $20,000 today.
Thank you for another helpful video. This totally reinforces my choice to wait until redemption or maturity to pay taxes on the interest. It also provides a reminder of another benefit of t-bills paying interest more frequently due to their shorter term in addition to their greater flexibility and liquidity. I suppose you could redeem your i-bonds every 15 months to trigger the 1099-INT, but then you’re forfeiting 3 months interest.
OK, I used your ibond interest calculator to develop a spreadsheet from "Hell" to calculate annual iBond interest over a 5-year (and more) term. As we are retired in this household , I don't want a future ibond interest payment (after a 5 year holding period) and future required minimum distribution to trigger a future increase in monthly Medicare premium payments. So, I will be claiming iBond interest annually. Thanks for these You Tube videos.
Another great video! It would be an interesting study to show the different scenarios given variable facts. One must consider the materiality of the interest at maturity vs picking up the interest annually. And it's likely tax rates will go up. Look at tax rates before the 90s. Also let's take into consideration the 3.8% net investment tax that could be assessed. There's a bunch of other considerations. One thing i do wonder is the proper proof to provide IRS at the year of maturity reporting if one had reporting the interest income annually. Keeping track on a spreadsheet(s) and attaching that to the tax return in the year one receives the 1099-INT is my best thought now but I'm curious what the annual reporters on this thread plan on doing. I'm not sure what i plan on doing yet but i do know reporting the interest in the year I receive my 1099-INT would be easier and less risky. One point you made Jennifer was enlightening. If the IBond is owned by a child, especially if bought while young, picking up the interest annually would likely result in zero tax for a lot of years given the offset by the standard deduction. Fantastic! Thanks Lammer. You're the goods!
Thanks for this great content, Jennifer! If I elect to pay I-Bond taxes annually for the I-Bonds in my account - would I also need to pay taxes for the I-Bonds held at someone else's Gift Box that has yet been delivered to me? Also, if I elect to pay I-Bonds annually and subsequently redeem all of my I-Bonds - when I decide to purchase I-Bonds in the future (after all my current I-Bonds are redeemed), would I have to report taxes annually for those future I-Bonds?
One question is concerning the interest penalty they take out whether or not you cash the I bond out before 5 years or not. If you report the interest in over the first 5 years, do you add the penalty amount to the interest they show to get the total amount reported to the IRS? If you bought some in Oct 2022, balance shows $0 interest for the 4th qtr of 2022 since they take out the penalty. Should the reported amount on Sch B be $0 or would you have to put the interest actually accumulated but not shown?
For those that decide to pay annually on paper bonds, is there a specific EIN that we use for the U.S. Treasury? Obviously, that would be information needed if we are paying annually but won't officially get until we receive a statement at cash in.
Thanks for the videos, I bought I bonds in 2000.2001 and 2003 I was able to buy 30k each year back then. My question is do I have to cash them at 30 years or can I Cash them in year 31 and beyond ? I think what I need to do is start cashing half them in starting in year 2027,2028 and 2029. Thanks
Hi Jennifer, how do you report your ibond interest annually on your tax forms? I have calculated the amount to declare, I am just not sure where to report it without the 1099-INT form. Thanks!
To give me more flexibility I bought my $10,000 iBond in $2,500 increments so I could redeem them separately at smaller amounts to spread the tax liability over different years if I decide to redeem them. Hope this helps.
I, too, purchased 10k of I bonds in $2500 increments because someone commented that redemption was all or nothing. Meaning, you can either redeem all 10k at once or none at all. No partial redemption if you bought in a 10k lump sum. I don't think that's true, but you've enlightened me on the tax angle of incremental redemptions.
It seems, then, that I-Bonds can a hassle. However, it seems to me, disclaimer, I am not advising anything, that paying taxes at maturity or redemption is the safest thing to do. Fewer chances to forget something. Fewer chances to just get something wrong. Fewer hands stirring the pot and causing confusion and getting in each other's way. I'll file at the end and not along the way.
That’s how we feel as well (and why we‘re paying taxes at I-Bond maturity/ sale) but it may make sense for others. I think a lot of supersavers new(er) to I-Bonds also simply wanted to know how complex it can get to pay I-Bond taxes annually.
I pay tax on my I Bond interest annually. I check Treasury Direct for accrued interest in December of each year. The interst is the current account I bond balance minus the basis. I then subtract out interest from each of the prior years. I keep track of each year's I bond interest by completing an information-only 1040 Schedule B that I keep on file to list the yearly I Bond interest. So, for example, in year 5 I check the total interest in Treasury Direct, and then subtract out the I Bond interest listed on each of the four pior year 1040 Schedule B forms to come up with the interest amount to report in the current year. It will become more complicated when I ultimately redeem some of the I bonds and download the 1099=INt from Treasury Direct and have to re-establish the baseline I'm working with. Any shortfalls in this approach?
I am switching to the annual accruel method. It will be nuts crazy for 7 , 8, and 9 years from now. Maybe I will redeem everything in 2030, when my first batch of ibonds was purchased. Anyway, I have already been making quarterly tax payments based on me starting NOW paying interest I have earned over the last 23 years. So, in 7 years, some of those ibonds will be mature. I regret that I will be paying a tax accountant more for doing this, and had not thought of it until this video.
Throwing this out there.If the debt ceiling isn’t raised right away but let’s say it takes a few extra weeks.What happens to the principle and interest we would generally get back into our savings accounts on Tues morning using 4/8 Bills. 2) Should we accumulate the money we get back every week and wait for the smoke to clear? What’s your plan?
Hi Jennifer, love the videos. I have an unrelated question: if you autoroll US T bills at Fidelity, does only the principal autoroll? What about the interest? Thanks, keep the videos coming!
If you placed an order initially for $1,000 face value of T-Bills, when those T-Bills mature, Fidelity will pull whatever funds it needs from your account to purchase the next $1,000 face value of T-Bills with the same term.
Excellent presentation! I've thought about paying interest for certain years when it appears convenient tax-wise (and simply subtracting those years upon maturity) but that might seem like something the IRS wouldn't like, unless I'm mistaken.
How about a compromise method? Holding each iBond for five years, redeeming it without penalty and then buying a new one to replace it? The accrued interest and incurred tax will be much less than if you held it for 10, 20 or 30 years and you will be less likely to fall into a higher tax bracket. Do you find any fault with this method?
Good idea..... but ---- I have older I-Bonds that have FIXED rates of 1%, 1.2%, 1.2%, 1.6% and 3.4%. Add the variable rate and the composite rate is much higher then anything I could replace them with. SO -Don't want to cash any of these early.
I really wanted to start paying the interest on my I bonds purchased in 21 and 22 since in a few years and going forward my tax rate on the interest will double, but after further research, it appears I would have to pay all the interest earned to date (in 21 and 22), which would result in a penalty for going over the $1000 max due to the IRS for 22. If I’d only done the research sooner……
Hi Jennifer! I have always enjoyed your videos! Thank you. One question, if I paid I-bond taxes annually, and later redeemed the money for higher education to get the tax exclusion, could I still get the paid taxes back?
@DiamondNestEgg Jennifer love your videos, I have a question about the interest earned on I bonds, if you earn interest every 6 months and that interest is added to your overall bond value, then is that interest that's been added locked in, I mean can't go away because of declining interest rates in the future. I guess what I'm asking is say your have $10,000 in I bonds and after a year you have $10,500. Is it possible for your to lose part or all of the $500 interest you have earned that year because of future rates or is it locked in and now part of your "never goes away" money?
Using your example, if you have $10,000 in I-Bonds and after a year you have $10,500, you will not lose that amount (which you've already earned) if I-Bond rates go down in the future.
I think I'm going to pay annually. I already keep a spreadsheet on how much my HYSAs, CDs, brokerages, and TSP grow annually over any amount I personally contribute even though I get annual statements that indicate this. I could do the same for my I-bond. Additionally, my situation may be more advantageous to paying the tax now. It's a paper I-bond and I'm a diplomat that moves every 2-3 years. I'm not sure where the IRS would send the 1099 some 29 years from now. I'd rather have paid the tax in advance than to chance that 1099 being sent to some address I've long moved on from and being in legit arrears with the Treasury.
Not paying taxes till redemption, you converted me! Although, I'm probably one of those who would pay less tax if I did annually. But ya, too much work and room for error, so I'll pass🙃
Am I correct in assuming that if I purchased an I bond through my SOLO 401K Roth Account. I dont need to worry about taxes on the interest ever, right?
Paying annual taxes on I-bonds seems like a strategy that is penny-wise and pound-foolish. With the records requirements, which you'll need to hold upwards of 30 years, seems like there's a serious risk of problems at some point in the future.
Hi Jennifer thank you so much for these videos and updates. I started following your post approx. 2 months ago and I very impressed by your common scene knowledge. I do want to learn more about muni bonds and how to purchase them vis Charles svhwab. I've look at them on my my computer/account but I don't understand the coupon rate and all the other rates. If you can you help with this. Thanks Ed
If you have the IBond account under your child's name who you still claimed as your dependent, wouldn't you have to report the income under yours? Or the child needs to file separately. Thanks.
Thank you for the nice video Jennifer! Very helpful as always! Could you make a video after the middle of next month after the CPI number comes out with your prediction on what you think the next I-bond interest rate will be for the next 6 month period? Or maybe have a contest for your community to guess the next I-bond interest rate and whoever gets the closest wins a prize. Maybe the prize could me a small diamond in a plastic Easter egg because of the name of your channel and the fact that Easter is coming up.
Jennifer, please tell me what do you think the new I Bond interest rate will be in April 2023. I am considering putting money into a Capital One 360 11 month 5.0% Interest CD or looking around for another CD going higher than 5 % because my wife and I have already purchased our $10,000 maximums for this year and have already gifted each other the same for this year as well
Waaaay too complicated to report annual interest. Pay it when redeemed and just make sure that you redemptions from other sources don't increase your tax bracket.
I just can't wait to pay taxes more than I have to. I just can't pay them soon enough. That's ridiculous. The whole point is the deferred income aspect and the ability to cash them in when you have a lower income year.
We’re also waiting until maturity with regard to I-Bond taxes but some supersavers want to/ are curious about paying taxes on interest earned annually (and in some specific cases it does make sense as I outlined in the video)
I got into I bonds in hope of an early retirement plan (still 10 or 11 years out) but I suspect there will soon be a deflation period with 0 rates, short circuiting my plan.
Jennifer your content, explanations, and videos are top tier. Your channel is easily one of the best finance channels on TH-cam!
Well, I was planning to pay annually, but you summarily talked me out of it. I would have started a nightmare of recordkeeping that i may have regretted. THANK YOU for making this video!
I keep coming back to watch this video again during tax season since I am reporting I-bond interest yearly instead of at maturity. Thanks for the clear concise explanation as usual.
Learned something new about I bonds didn't know we had the option of paying taxes annually or at maturity, thanks Jen 😃
I like to keep things simple in regards to taxes so at redemption will be when I pay the tax. Love your channel and look forward to each video.
Glad you're a part of our community Ellen!
Thank you for the video - clear and easy to follow. For people on Medicare, or who will be on Medicare when a redemption is made, a redemption may trigger extra Medicare tax. They should consider the impacts of lump sum interest and what that does to their Modified Adjusted Gross Income. If you are close to an IRMAA bracket (Medicare Tax brackets) and the redemption pushes you into the next bracket the tax increase is incremental. For the first bracket going $1 into the bracket will cost a couple about $2000 a year in extra Medicare premiums (tax). Assuming 5% interest for 20 years a $10,000 I bond will have generated about $16,000 in interest, 3% would be about $8K interest.
12:20 Thanks to supersaver Steve for pointing this out: If you are already paying taxes annually on Series EE or E interest earned, you will need to use the same methodology for your I-Bonds.
--------
Thanks for visiting our personal finance channel! We hope this free content will help fast-track your financial journey! Everyone's financial journey is different. Please note that there are questions/ comments which I will not be able to answer without fully understanding your financial, personal & other circumstances.
WATCH NEXT:
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Thanks for doing the heavy lifting on this subject! I'm going to listen to this again and give it undivided attention. I can't thank you enough for all your quirky, fun and informative videos you put out! What a gift! Thank you so much and looking forward to your next nugget of info!
This video was a great help for refreshing what I need to do in preparation for this year's I-Bond purchases. Thanks, Jennifer.
Thanks for this video Jennifer! Seems to me that paying at redemption or maturity is the clear winner. Not only is it far less complicated, you also don't have to dip into other funds to pay the taxes along the way (funds that could themselves be growing in value in the stock market and whatnot). Even if it was no less complex, seems like paying every year is worse just from an opportunity cost standpoint.
Well actually in my case I had a large tax credit in couple of years about when I bought an electric car. So to take advantage of the tax credit as much as possible, I chose to report the interest on the I-Bond yearly so that I would not have to pay tax on the interest for that year! It's not that difficult to track if you have only one I-Bond.
I just love your videos. While I am moderately sophisicated investor, I learn from every single one or your presentations. Your explanations of everything you do are stellar. Thank you!
I second that!!👍👏😀
Paying on redemption and planning to redeem the year after I am no longer working in about 10 years! Thanks as always!
This is everything I needed to know about taxes on I-bonds, thank you so much! I came here with the desire to pay the tax annually simply to spread that cost out over several years, rather than one big bill at the end, but with the complication involved, I'll just wait until the end.
Time to setup a spreadsheet! 2022 was my first investment in I-bonds. Retired and low taxable income, I pay no federal income tax annually. But if I wait, I might. It's worth it to me.
Thanks for sharing Chuck!
Yep, this is exactly what I do. I input my monthly interest earned on each ibond in a spreadsheet.
Thank you Jennifer for the great info!! We’ll be waiting to pay the taxes on our I bonds until redemption.
IMPORTANT QUESTION: Suppose you bought iBonds in January 2022 and want to pay future taxes on interest yearly. For tax year 2022, you would declare on your tax return 8 months of interest (Feb 1 thru Sep 1) since there is a 3-month penalty (Oct 1 thru Dec 1) for selling before 5 years, right? But how do things carry over to the following tax year (2024)--what happens to the 3 months' penalty interest at the end of 2023 (does it carry over to tax year 2024 even though it was earned for tax year 2023)?
I suppose a simpler way to ask this question is as follows...I think I understand how to declare the interest in tax year 2022 (withholding 3 months of penalty interest), but assuming I continue to hold all the way through 2023, what should be declared for tax year 2023 (keeping in mind there is still a 3-month interest penalty)?
A top advantage of reporting at redemption is if you expect your child to be in college at that time, the interest on redeemed US Savings Bonds will be exempt from federal taxes, if you use those proceeds to pay college tuition.
So if you have a 13-year-old child, now could be a perfect moment to start making annual bond purchases that you'll redeem in five years.
Thanks for sharing. If you're planning on doing this, make sure you understand the requirements to do so: www.treasurydirect.gov/savings-bonds/tax-information-ee-i-bonds/using-bonds-for-higher-education/
Thanks for making this video. It was very informative and helpful. I appreciate all that you do in your videos.
It makes sense to wait until redemption, especially if you plan to cash the I Bonds out in retirement. My understanding is that we'd then be in a lower tax bracket, so the burden would be less. I agree with you that paying tax on the interest annually looks like a huge headache.
Im paying taxes on I- bonds at redemption or maturity. I started buying I-bonds in 2000. Not looking forward to paying the taxes on those as they will be in a top bracket. but the recording seemed like a nightmare. I'm grateful for the tax deferred compound interest.
Cash ibonds in retirement. Possibly in a lower tax bracket.
Those i-bonds from very early 2000s must be earning a really great return from that fixed rate.
@@vivisimonvi last year combined rate was 13.39%, The $10,000. I-Bonds are now worth $40,000. and you could buy $30,000 paper and $30,000 e-bonds for a combined $60,000. per year. And you could also gift I-bonds.
@@robertryan3490 Not complaining, I'm retired , truly blessed to be paying higher taxes in retirement.Worked construction my whole life. Did without many things and toys, put 2 kids through college with no loans.Started investing small amounts in stocks when I was 18 . I was an unusual kid.
This video just verified my decision to allow my IBonds to accrue value on a tax-deferred basis given my retired status!
I did this years ago with EE bonds when I was a student. I had a bunch of bonds that had been gifted to be, that were in my name (so they weren't eligible for the education exemption), and realized in advance that if I redeemed them all at once to partially pay for grad school I'd be hit with a large tax bill (both because of the interest amount as well as the fact that I had started working part time), so I switched to the annual payment method a couple of years before I needed to redeem them. I did get hit with a small tax bill that first year, but it was much less than if I had waited. And yes, I was very much a tax nerd even as a student.
Also, while I totally agree that there is a bit of recordkeeping involved that can seem overwhelming, the easiest way I found to do this is to set up a spreadsheet where each row is an individual bond (the first columns can even include info like serial number for paper bonds, issue date, etc.), and then each data column is where you record the end of year value. You add a column every year with the new value, and then it becomes easy to calculate interest earned in any given year. Yes, you still have to spend the time looking up each bond's values, but at least it all gets saved in a easy-to-reference grid so you only ever have to do that once for any given year.
Thanks for sharing!
At redemption. No question. Two reasons. First, and you highlighted this, is the complexity of keeping track of an ever-increasing number of I-Bonds over an ever-increasing span of time. The spreadsheet you will need to create, and then relearn every year, will grow at x^3. It becomes a job in of itself. Besides, try explaining it to your surviving spouse after you've kicked the bucket. Yeah, not going to happen. Second reason is we intend to live like paupers, which means we'll be in a lower tax bracket. Happy investing! 🙂
Another great video. I learn something each time I watch your channel. For simplicity’s sake, I’ll pay the taxes at redemption
At redemption. Simpler and tax deferred interest allows for more, albeit small, investments. Thank you for your easy to understand explanations on fixed income.
Glad the video was helpful
Definitely at redemption in our house! Thanks as always JL!
I have bought I-Bonds over the last year and a half. I will wait until redemption to pay taxes because luckily for me I am retiring in a year and will be in a lower tax bracket. So if you are close to retirement this may benefit you as well.
Thanks for sharing Tony
Jennifer, your videos are well done and informative. You're a good educator! Thanks again
ps… im waiting until redemption to report my Ibond interest income. easier for me
Jennifer, great video, as usual. Personally I will be paying my taxes on the interest earned on I Bonds when they are redeemed. For what it’s worth, you can put (federal) backup withholding on your TreasuryDirect account so when the bonds are redeemed or when they mature, taxes will be withheld automatically. It’s not a perfect option, but a lot easier than paying taxes each year.
I was hopeful that you would produce a video on this topic. Excellent video. Thorough, detailed and factually accurate. In my situation, I have chosen to pay tax on the interest now. I am retired and the reason I made this choice was (1) that the individual income tax rates enacted by the Tax Cuts and Jobs Act will sunset in 2025 and who knows if the rates will revert to 2017 levels or what new rates will be legislated in 2026 given the current financial climate. (2) My income will increase in the future with upcoming RMD's from IRA's which could involve moving my marginal tax rate to the next level. (3) My main intent with the I Bond purchase (other than the attractive yield), was to create an asset that I could choose to use at some later time or pass to my children. Paying tax on the interest now would essentially make inherited I Bonds tax free for the recipient. The recordkeeping is something I already do so that is not an issue for me. Anyway, those were the main factors that affected my decision to report the interest income as I earn it. Keep the great videos coming.
Your decision make sense!
Terry, like you I'm 20 years into i-bonds, 10 years left till maturity. Can we pay accumulated interest now, rather than wait for maturity (taxes lower & rmds not an issue yet)...Jennifer didn't address that option.
@@keith8325 I believe that what was presented in the video is accurate in that you essentially make the election when you first purchase the bonds. If you don't elect to report "accrue" the interest annually when first purchased you, as a cash basis taxpayer, are "deemed" to have elected to report the interest at redemption when you receive it. To change methods after the initial year of purchase you would have to file and have approved a change in method of accounting. Once again, I think this was covered in the latter portion of the video. Hope this helps.
TT
Thank you for sharing Terry
@@terrythurman6899 Publication 550 states (page 7) that you can switch from the "accrue" method to the annual payment method without permission at any time, as long as you report all interest accrued to-date and pay taxes on that interest when you do so. It's switching back to the "accrue" method that requires IRS approval (which normally is automatically granted, but does require the affirmative step of asking).
In other words, it's a one way street. You can switch *to* paying taxes on interest annually any time you'd like (it's kind of like a Roth conversion--you need to pay taxes on the total gain in value to-date, but then you don't pay taxes on that value again), but switching back to paying upon redemption requires jumping through a few hoops.
Thanks Jennifer for such a wonderful channel. I love watching your videos and nonstop learning!!! ☆☆☆☆☆
For those doing annually, be aware that relatives often bought EE or I bonds in kids names and held onto them. We had that happen for several generations and would have been in trouble if we had been reporting annually. Additional Treasury Direct holds back reporting the last three months interest until you hit the five year mark, but I haven't found anywhere that states you definitely don't have to accrue that interest. Video doesn't accrue the interest, but not sure either way what IRS would demand.
Latest data indicates it's unlikely I-Bond rates are going down in May. So glad I got in and bought $10k worth in the fall of 2021 and spring of 2022. Making great interest!
Thanks! What data are you referring to? Would love to share with other supersavers.
Thank you for all the wonderful information that I have received from your videos! I have learned so much great information from you and feel a lot more confident than I ever have felt in a long time!
This is a lot of work to keep up with!For me, I have to opt to take the one-time income bump in the year or redemption.
That's our feeling as well!
Excellent! Great info as always.
Thanks Jennifer for the info! We'll be paying the taxes at redemption! Its way too complicated to keep track annually.
Good morning Ms.Jennifer.Wjat a nice and surprise presentation.Watching it drinking my Masala chai
how do i set the withholding percentage I want taken out of my ibond redemption on treasury direct?
QUESTION: I purchased my first 10K of I-bonds in August 2022. I have chosen to pay the taxes annually. Am I permitted to pay tax on all five months of interest or must I exclude the three month early withdrawl penalty? I would like to claim as much interest as possible. I took early retirement in 2021 and will be at lower tax bracket for only a few years. I will revert to a higher tax bracket once I start collecting Social Security in 2027. YOUR VIDEOS ARE EXCELLENT. Thank you for all your knowledge!
Glad you enjoyed the video - I walk through how to do this in the video
I'll go with redemption. Too complicated otherwise.
Why does the actual interest % figured out on t bills after auction come out lower than the posted interest % ?
Just for fun, I played with some numbers on the TD calculator. If you bought the first $10,000 I-Bond in August of 1998, it would be worth $40,748 today ($39,888 by the end of 2022). The value would have been $36,060 by the end of 2021. You would be reporting $3828 in earned interest (income) just for that single I-Bond in 2022 and paying taxes before maturity. To be fair, rates were probably at their peak for that year as well.
Replying to my own comment instead of an edit but the fixed rates attached to these early bonds (~3%) really helped with growth overall. The same figures don't look so great when the fixed rates started dropping to around 1% and below starting from May in 2003 on onward. For reference, an I-Bond purchased in May of that year would be worth slightly over $20,000 today.
I wonder about withholding tax rate voluntary 25% example from the other video. I like to know the right percentage to do.
Thank you for another helpful video. This totally reinforces my choice to wait until redemption or maturity to pay taxes on the interest. It also provides a reminder of another benefit of t-bills paying interest more frequently due to their shorter term in addition to their greater flexibility and liquidity. I suppose you could redeem your i-bonds every 15 months to trigger the 1099-INT, but then you’re forfeiting 3 months interest.
Thanks for sharing!
These are very informative! Thanks.
Very good information to know.
OK, I used your ibond interest calculator to develop a spreadsheet from "Hell" to calculate annual iBond interest over a 5-year (and more) term. As we are retired in this household , I don't want a future ibond interest payment (after a 5 year holding period) and future required minimum distribution to trigger a future increase in monthly Medicare premium payments. So, I will be claiming iBond interest annually. Thanks for these You Tube videos.
Thanks for sharing!
Another great video! It would be an interesting study to show the different scenarios given variable facts.
One must consider the materiality of the interest at maturity vs picking up the interest annually. And it's likely tax rates will go up. Look at tax rates before the 90s. Also let's take into consideration the 3.8% net investment tax that could be assessed. There's a bunch of other considerations.
One thing i do wonder is the proper proof to provide IRS at the year of maturity reporting if one had reporting the interest income annually. Keeping track on a spreadsheet(s) and attaching that to the tax return in the year one receives the 1099-INT is my best thought now but I'm curious what the annual reporters on this thread plan on doing.
I'm not sure what i plan on doing yet but i do know reporting the interest in the year I receive my 1099-INT would be easier and less risky.
One point you made Jennifer was enlightening. If the IBond is owned by a child, especially if bought while young, picking up the interest annually would likely result in zero tax for a lot of years given the offset by the standard deduction. Fantastic!
Thanks Lammer. You're the goods!
Glad you enjoyed the video & thanks for the insights!
Thanks for this great content, Jennifer! If I elect to pay I-Bond taxes annually for the I-Bonds in my account - would I also need to pay taxes for the I-Bonds held at someone else's Gift Box that has yet been delivered to me?
Also, if I elect to pay I-Bonds annually and subsequently redeem all of my I-Bonds - when I decide to purchase I-Bonds in the future (after all my current I-Bonds are redeemed), would I have to report taxes annually for those future I-Bonds?
One question is concerning the interest penalty they take out whether or not you cash the I bond out before 5 years or not. If you report the interest in over the first 5 years, do you add the penalty amount to the interest they show to get the total amount reported to the IRS? If you bought some in Oct 2022, balance shows $0 interest for the 4th qtr of 2022 since they take out the penalty. Should the reported amount on Sch B be $0 or would you have to put the interest actually accumulated but not shown?
Thanks again for another stellar video. I am going to pay taxes on redemption\maturity.
Thanks for sharing
Thanks for the video as I plan to report annually.
For those that decide to pay annually on paper bonds, is there a specific EIN that we use for the U.S. Treasury? Obviously, that would be information needed if we are paying annually but won't officially get until we receive a statement at cash in.
Thanks for the videos, I bought I bonds in 2000.2001 and 2003 I was able to buy 30k each year back then. My question is do I have to cash them at 30 years or can I Cash them in year 31 and beyond ? I think what I need to do is start cashing half them in starting in year 2027,2028 and 2029. Thanks
Hi Jennifer, how do you report your ibond interest annually on your tax forms? I have calculated the amount to declare, I am just not sure where to report it without the 1099-INT form. Thanks!
To give me more flexibility I bought my $10,000 iBond in $2,500 increments so I could redeem them separately at smaller amounts to spread the tax liability over different years if I decide to redeem them. Hope this helps.
I, too, purchased 10k of I bonds in $2500 increments because someone commented that redemption was all or nothing. Meaning, you can either redeem all 10k at once or none at all. No partial redemption if you bought in a 10k lump sum.
I don't think that's true, but you've enlightened me on the tax angle of incremental redemptions.
Hi. For electronic bonds, you can buy $10K all at once and do partial redemptions. The minimum redemption amount is $25.
@@DiamondNestEgg Thank you for your helpful response!
It seems, then, that I-Bonds can a hassle. However, it seems to me, disclaimer, I am not advising anything, that paying taxes at maturity or redemption is the safest thing to do. Fewer chances to forget something. Fewer chances to just get something wrong. Fewer hands stirring the pot and causing confusion and getting in each other's way. I'll file at the end and not along the way.
That’s how we feel as well (and why we‘re paying taxes at I-Bond maturity/ sale) but it may make sense for others. I think a lot of supersavers new(er) to I-Bonds also simply wanted to know how complex it can get to pay I-Bond taxes annually.
Im paying taxes on i bonds at redemption or maturity
Thanks for sharing!
I pay tax on my I Bond interest annually. I check Treasury Direct for accrued interest in December of each year. The interst is the current account I bond balance minus the basis. I then subtract out interest from each of the prior years. I keep track of each year's I bond interest by completing an information-only 1040 Schedule B that I keep on file to list the yearly I Bond interest. So, for example, in year 5 I check the total interest in Treasury Direct, and then subtract out the I Bond interest listed on each of the four pior year 1040 Schedule B forms to come up with the interest amount to report in the current year. It will become more complicated when I ultimately redeem some of the I bonds and download the 1099=INt from Treasury Direct and have to re-establish the baseline I'm working with. Any shortfalls in this approach?
I am switching to the annual accruel method. It will be nuts crazy for 7 , 8, and 9 years from now. Maybe I will redeem everything in 2030, when my first batch of ibonds was purchased. Anyway, I have already been making quarterly tax payments based on me starting NOW paying interest I have earned over the last 23 years. So, in 7 years, some of those ibonds will be mature. I regret that I will be paying a tax accountant more for doing this, and had not thought of it until this video.
Thanks for sharing Natasha - hope it works out!
Throwing this out there.If the debt ceiling isn’t raised right away but let’s say it takes a few extra weeks.What happens to the principle and interest we would generally get back into our savings accounts on Tues morning using 4/8 Bills.
2) Should we accumulate the money we get back every week and wait for the smoke to clear? What’s your plan?
As I've said before, I don't expect the US to default & taking a few extra weeks is still considered a default (in my mind)
I’m paying at redemption when I have the money. I can envision a tax scenario which would make sense to report and pay sooner, but I’m not concerned.
Hi Jennifer, love the videos. I have an unrelated question: if you autoroll US T bills at Fidelity, does only the principal autoroll? What about the interest? Thanks, keep the videos coming!
If you placed an order initially for $1,000 face value of T-Bills, when those T-Bills mature, Fidelity will pull whatever funds it needs from your account to purchase the next $1,000 face value of T-Bills with the same term.
Excellent presentation! I've thought about paying interest for certain years when it appears convenient tax-wise (and simply subtracting those years upon maturity) but that might seem like something the IRS wouldn't like, unless I'm mistaken.
The IRS' job is to collect any and all money. Whether they like it or not. 🙂
www.irs.gov/publications/p550#en_US_2021_publink10009906
Says you can but looks like you'd have to paper file to attach the statement.
Yes! It’s called flat taxing!!
I’m going to ask our accountant when we should report the interest. He’s also an I-Bond purchaser, so he’ll be aware of the pros & cons.
Good idea - let us know what he says when you get the chance!
Please let us know
@@DiamondNestEgg My accountant does NOT recommend paying tax on interest annually.
@@NancyLearyFischer thank you!
Thanks for sharing. Did your accountant say why?
How about a compromise method? Holding each iBond for five years, redeeming it without penalty and then buying a new one to replace it? The accrued interest and incurred tax will be much less than if you held it for 10, 20 or 30 years and you will be less likely to fall into a higher tax bracket. Do you find any fault with this method?
Good idea..... but ---- I have older I-Bonds that have FIXED rates of 1%, 1.2%, 1.2%, 1.6% and 3.4%. Add the variable rate and the composite rate is much higher then anything I could replace them with. SO -Don't want to cash any of these early.
With interest rates going up..not a good idea to lock up for long terms. IMO
CDs are showing good rates at shorter terms. Just saying.
I really wanted to start paying the interest on my I bonds purchased in 21 and 22 since in a few years and going forward my tax rate on the interest will double, but after further research, it appears I would have to pay all the interest earned to date (in 21 and 22), which would result in a penalty for going over the $1000 max due to the IRS for 22. If I’d only done the research sooner……
Thanks for sharing & good luck
Jennifer need your help. I can't find how to add with holdings taxes on Treasury Bills at treasury direct.
There's a section in this video that walks you through how to do this step-by-step for I-Bonds & T-Bills: th-cam.com/video/PEWRMfbNgLs/w-d-xo.html
Hi Jennifer! I have always enjoyed your videos! Thank you. One question, if I paid I-bond taxes annually, and later redeemed the money for higher education to get the tax exclusion, could I still get the paid taxes back?
At redemption or maturity of course. The ‘savings’ in reporting annually would definitely be eaten up my tax preparer’s fees.
That's the position we're in as well.
Perfectly articulated!
12:20 in. I think it says if you already report interest annually on your EE bonds you now must do that for your I bonds. No choice.
Correct - I'll actually put a note about this in the description/ comments.
@DiamondNestEgg Jennifer love your videos, I have a question about the interest earned on I bonds, if you earn interest every 6 months and that interest is added to your overall bond value, then is that interest that's been added locked in, I mean can't go away because of declining interest rates in the future. I guess what I'm asking is say your have $10,000 in I bonds and after a year you have $10,500. Is it possible for your to lose part or all of the $500 interest you have earned that year because of future rates or is it locked in and now part of your "never goes away" money?
Using your example, if you have $10,000 in I-Bonds and after a year you have $10,500, you will not lose that amount (which you've already earned) if I-Bond rates go down in the future.
I think I'm going to pay annually. I already keep a spreadsheet on how much my HYSAs, CDs, brokerages, and TSP grow annually over any amount I personally contribute even though I get annual statements that indicate this. I could do the same for my I-bond. Additionally, my situation may be more advantageous to paying the tax now. It's a paper I-bond and I'm a diplomat that moves every 2-3 years. I'm not sure where the IRS would send the 1099 some 29 years from now. I'd rather have paid the tax in advance than to chance that 1099 being sent to some address I've long moved on from and being in legit arrears with the Treasury.
Thanks for sharing
Not paying taxes till redemption, you converted me! Although, I'm probably one of those who would pay less tax if I did annually. But ya, too much work and room for error, so I'll pass🙃
Thank you for sharing!
Compounding interest is compounding tax!
Am I correct in assuming that if I purchased an I bond through my SOLO 401K Roth Account. I dont need to worry about taxes on the interest ever, right?
You can only buy I-Bonds via TreasuryDirect: th-cam.com/video/adzmox__2zM/w-d-xo.html
Paying annual taxes on I-bonds seems like a strategy that is penny-wise and pound-foolish. With the records requirements, which you'll need to hold upwards of 30 years, seems like there's a serious risk of problems at some point in the future.
I brought in October 2022 do I still to be report it to the irs,or wait until when I redeem.
If you bought in Oct 2022, there's nothing to report for that tax year in any case.
Hi Jennifer thank you so much for these videos and updates. I started following your post approx. 2 months ago and I very impressed by your common scene knowledge. I do want to learn more about muni bonds and how to purchase them vis Charles svhwab. I've look at them on my my computer/account but I don't understand the coupon rate and all the other rates. If you can you help with this.
Thanks
Ed
Noted Ed!
YOU ROCK!
If you have the IBond account under your child's name who you still claimed as your dependent, wouldn't you have to report the income under yours? Or the child needs to file separately. Thanks.
This IRS doc should provide more insights: www.irs.gov/taxtopics/tc553
At redemption!! Way too much to think about otherwise.
That’s our feeling as well
I wait for redemption or cash out.
Thanks for sharing
I am thinking to report mine and my husband at redemption, but reporting annually for my kids'....
Thanks for sharing
I plan on at redemption.
Thank you for the nice video Jennifer! Very helpful as always! Could you make a video after the middle of next month after the CPI number comes out with your prediction on what you think the next I-bond interest rate will be for the next 6 month period? Or maybe have a contest for your community to guess the next I-bond interest rate and whoever gets the closest wins a prize. Maybe the prize could me a small diamond in a plastic Easter egg because of the name of your channel and the fact that Easter is coming up.
Cute - I'll see what I can pull together!
My Series EE bond will mature next year, can I renewal it instead of cash it?
You can't renew it at maturity
I'm planning on using my ibonds for paying school loans or tuition, is there a different process?
www.treasurydirect.gov/savings-bonds/tax-information-ee-i-bonds/using-bonds-for-higher-education/
Redemption!
Jennifer, please tell me what do you think the new I Bond interest rate will be in April 2023. I am considering putting money into a Capital One 360 11 month 5.0% Interest CD or looking around for another CD going higher than 5 % because my wife and I have already purchased our $10,000 maximums for this year and have already gifted each other the same for this year as well
May 2023 I-Bond Rate Prediction | When To Buy I-Bonds In 2023
th-cam.com/video/90JAbdDo-sQ/w-d-xo.html
6 & 12 month T bills are 5%.
If I buy I-bonds in Treasury Direct as gifts but I die before I deliver them, what happens?
Pinned comment at the very top of this video answers this question: th-cam.com/video/bSoZJJypSAQ/w-d-xo.html
Sounds messy if you have an I bond in your gift box for a year before delivering it to a child who wants to report annually.
That was our feeling as well
At redemption!!! 😉
Thanks for letting us know!
Waaaay too complicated to report annual interest. Pay it when redeemed and just make sure that you redemptions from other sources don't increase your tax bracket.
Pay taxes annually.
Thanks for sharing
I just can't wait to pay taxes more than I have to. I just can't pay them soon enough. That's ridiculous. The whole point is the deferred income aspect and the ability to cash them in when you have a lower income year.
We’re also waiting until maturity with regard to I-Bond taxes but some supersavers want to/ are curious about paying taxes on interest earned annually (and in some specific cases it does make sense as I outlined in the video)
I got into I bonds in hope of an early retirement plan (still 10 or 11 years out) but I suspect there will soon be a deflation period with 0 rates, short circuiting my plan.
As always, great information! Thanks so much!