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Author: LuckyDog2002 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35345  
Subject: EE bonds Date: 6/14/2007 5:59 PM
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I bought 2 EE bonds back in Oct. 1986, 20K total. According to the treasury direct site, they are earning 4 % right now.
Thinking I might cash them in and stick them in a higher interest CD.

Any thoughts on this move?

LuckyDog
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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20737 of 35345
Subject: Re: EE bonds Date: 6/14/2007 6:50 PM
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If you cash in your EE bonds you'll have to pay the taxes on the accumulated interest. A beauty of EE bonds is the tax deferral. Of course you will eventually have to pay the tax anyway when you cash in the bonds.
If this is OK, go ahead.
Best wishes, Chris

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Author: loveoldcars Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20738 of 35345
Subject: Re: EE bonds Date: 6/14/2007 7:11 PM
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Hi guys,

What if I gift my EE bonds to the kids, and they stick them in their IRA's?

rk

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20739 of 35345
Subject: Re: EE bonds Date: 6/14/2007 9:04 PM
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f you cash in your EE bonds you'll have to pay the taxes on the accumulated interest. A beauty of EE bonds is the tax deferral. Of course you will eventually have to pay the tax anyway when you cash in the bonds.
If this is OK, go ahead.


Crunch the numbers. You've got another 9 years you could be deferrng taxes on interest. But unless you are going to be in a lower tax bracket in 9 years (and maybe not even then), you probably will be better off paying taxes now and doing something else with the money.

However, if this is emergency fund money, you might just want to leave it, since the EE-bonds are liquid (minus taxes) and a CD wouldn't be.

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Author: blacktreechaser Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20740 of 35345
Subject: Re: EE bonds Date: 6/14/2007 10:10 PM
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Maybe I'm not remembering right, but I thought savings bonds that old guaranteed a 6% return. The interest will only kick in twice a year. I guess I'm just reccommneding double checking on their return.

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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20741 of 35345
Subject: Re: EE bonds Date: 6/14/2007 10:10 PM
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They can't put EE bonds in their IRAs.
You can only put one thing in an IRA--money. Now, you can do rollovers, from another tax-deferred account, but that isn't what you have in mind.
Sorry.
Best wishes, Chris

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Author: tdbowz One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20742 of 35345
Subject: Re: EE bonds Date: 6/15/2007 5:58 AM
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Maybe I'm not remembering right, but I thought savings bonds that old guaranteed a 6% return. The interest will only kick in twice a year. I guess I'm just reccommneding double checking on their return.

That 6% floor was only guaranteed for 12 years so after 1998 these bonds were earning a mere 4%. Depending upon ones income tax status the original poster may want to consider cashing one bond this Oct. and wait until Apr. 2008 to cash the other. That way you spread out the tax liability over two years and precisely at those two months will take advantage of the most recent period of interest accumulation.
td

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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20743 of 35345
Subject: Re: EE bonds Date: 6/15/2007 7:09 AM
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Changing ownership of EE bonds is usually a taxable event, requiring payment of taxes on all accrued interest.

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20744 of 35345
Subject: Re: EE bonds Date: 6/15/2007 8:32 AM
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Quick morning coffee calculation using TMF Savings calculator

$20,000 at 4% for 9 years would be worth $28,649. Assuming initial investment of $6000 (I don't know, but that would be about right at 6% over 20 years), we're talking tax on $22,649 gain. In a 25% bracket in 2016 (30 years), that would leave $22,986 (including initial contribution).

Cashing out now in 25% bracket (using $20,000 with $6000 investment), would leave $16,500. If you invested in a 10 year Treasury at next auction and got 5%, staying in 25% bracket, you would have $23,112 after 9 years (subtracting taxes). I used a Treasury to control for state taxes.

These two options aren't a whole lot different, and the EE-bond is more liquid. One thought would be to wait. If Pen Fed, or someone else, has a much higher yield, that would be a time to cash out (nuancing the tax issues). Or, mayne interest rates in general will get higher. The current differential between 4% and current Treasury/CD yields doesn't scream for a switch. ($116 over 9 years in my example.)

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Author: ajaskey Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20745 of 35345
Subject: Re: EE bonds Date: 6/15/2007 8:46 AM
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$20,000 at 4% for 9 years would be worth $28,649. Assuming initial investment of $6000 (I don't know, but that would be about right at 6% over 20 years), we're talking tax on $22,649 gain. In a 25% bracket in 2016 (30 years), that would leave $22,986 (including initial contribution).

I don't think any tax analysis comparing today versus more than 10 years from now is worth anything. There is absolutely no way of knowing what the tax rate structure will look like beyond 10 years - and 10 may be stretching it a bit. Taxes must be paid eventually and plans based on tax rates could cause a lot of heartache when the world changes around us.

Andy

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20746 of 35345
Subject: Re: EE bonds Date: 6/15/2007 9:03 AM
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I don't think any tax analysis comparing today versus more than 10 years from now is worth anything. There is absolutely no way of knowing what the tax rate structure will look like beyond 10 years - and 10 may be stretching it a bit. Taxes must be paid eventually and plans based on tax rates could cause a lot of heartache when the world changes around us.

Current decisions need to be made based on guesses about the future, including taxes. Presumably taxes will be different in 10 years, but unless there is a good reason for expecting personal taxes to be different (e.g., lower bracket after retirement, higher bracket because of current lowincome situation not likely to continue), the best we can do is assume current rates.

We can also make educated guesses about the politics of taxes, which doesn't mean the guesses will work out. It is going to be very difficult politically to raise taxes on the middle class, unless there is some specific quid pro quo (e.g., higher income taxes for a national health plan that saves most people more than the higher taxes). On the other hand, I would expect to see a lot of people cashing in stocks before the 15% capital gain disappears—there's a lot of powerful interests who want to see it continued, but it does nothing for most people.

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Author: loveoldcars Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20747 of 35345
Subject: Re: EE bonds Date: 6/15/2007 9:33 AM
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How about cashing the EE's and buying your states muni's, quite easy right now to purchase 5% coupons that will pay around 4.75% YTM; or a muni-CEF (like Nuveen) for your state yielding 5%, and Drip the divs.

This way you have increased the % income by 20-25% and thumb your nose at the taxes...

rk

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20748 of 35345
Subject: Re: EE bonds Date: 6/15/2007 10:17 AM
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How about cashing the EE's and buying your states muni's, quite easy right now to purchase 5% coupons that will pay around 4.75% YTM; or a muni-CEF (like Nuveen) for your state yielding 5%, and Drip the divs.

Curretnly, you can get a AAA 5 or 10 year Bank bond with a better yield in a 28% bracket than a AAA muni.

http://www.bloomberg.com/markets/rates/index.html

A state specific muni in a high tax state could swing the difference. But the Bloomberg numbers do not include commissions or markups, which typically are higher with munis.

Muni funds, like other funds, have interest rate risk issues. Vanguard has low cost state specific muni funds.

6% AAA 10-year bank bonds actually look fairly attractive at the moment. The premium over Treasuries has increased. (Based on Bloomberg: I haven't tried to see what is actually listed.) There also aren't any CDs at the moment competitive with 6% AAA bank bonds (or even 5 years, which were something like 5.75%).

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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20749 of 35345
Subject: Re: EE bonds Date: 6/15/2007 11:07 AM
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How about cashing the EE's and buying your states muni's,

My state's munis? Are you nuts? My state is going bankrupt, probably before my parents retire.

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20750 of 35345
Subject: Re: EE bonds Date: 6/15/2007 11:30 AM
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Curretnly, you can get a AAA 5 or 10 year Bank bond with a better yield in a 28% bracket than a AAA muni.

I decided to follow up by looking at Vanguard bond desk for what's out there in the high investment grade corporate category (5-10 year maturities), which I haven't done for several months, due to Pen Fed sale and subsequent lack of money.

Right now I'm seeing lots of 6%+ (up to about 6.25%) on AA to AAA bonds (mostly financials), before commission.

I'm still looking to July TIPS auction, but these corporates are definitely worth keeping in the differential.

The point we need to keep making on this board is that the best choices for "fixed-income" change. I got used to AA and AAA having a minimal premium, especially after state taxes, over Treasuries and almost always being below CD yields. But this is not true at the moment. I'll see in September, when I have a Vanguard CD coming due.

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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20751 of 35345
Subject: Re: EE bonds Date: 6/15/2007 12:03 PM
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<Right now I'm seeing lots of 6%+ (up to about 6.25%) on AA to AAA bonds (mostly financials), before commission.>

Thanks, Loki, I'll head on over there.

By the way, did you decide that you like your Feste plaque, after all ;-)?

Wendy



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Author: loveoldcars Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20752 of 35345
Subject: Re: EE bonds Date: 6/15/2007 12:21 PM
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Hi guys,

Here's a personal example(63 and retired here, so Muni-bonds, and Muni-CEF's are important to me!!):

Nuveen's nat'l Muni-CEF (NXZ) currently paying 0.876/yr. @ $15.7; =5.8%.

about 10% is subj. to AMT, and is state taxable(5%AZ) which yields 5.16% after taxes (assuming you ARE subj. to AMT).

this equates to 6.45% were it qualified divs., and 7.5% is ordinary income.

rk

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20753 of 35345
Subject: Re: EE bonds Date: 6/15/2007 1:29 PM
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Nuveen's nat'l Muni-CEF (NXZ) currently paying 0.876/yr. @ $15.7; =5.8%.

Vanguard's intermediate and long term muni funds (national) are currently yielding 4% and 4.2%.

https://flagship.vanguard.com/VGApp/hnw/FundsByName?type=PIWANTTO1

Vanguard is always a good basis for comparison for having low cost conservative funds. That means Nuveen must be getting the extra yield by taking on greater risk—either lower grade munis or leveraging (or both).

And, with funds there is always interest rate risk to consider, although it is less now than when interest rates on the whole were 100-150 basis points lower.

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