Buying I-Bonds with pre-tax money

I am retired and have most of my investments in IRA’s. I would have to pull money out and pay taxes on it to purchase I-Bonds. So this would be taxed at a marginal rate of at least 22%. I-Bonds are at about 7% right now, but I can buy a MM within my IRA paying about 4.25% and not pay the taxes and have more flexibility such as buying stocks which may pay even more but have more risk. I have 4 more years before my required minimum distributions (RMD). What are the thoughts on this? Pay taxes and buy I-Bonds or not?

Hi @OU812 I’m going to bring out some other topics that come to mind based on your post.

Your marginal rate now is 22%… your RMDs start in 2027. Let me remind you that unless Congress acts, the tax brackets revert to the prior ones on 12/31/2025, the 10%, 15%, 25%, 28%, 33%, 35%, 39.6% brackets… remember those? Do you have a large IRA? Will taking the RMD push you into a higher tax bracket, a really bad one like 28% or 33%? What was your marginal tax bracket for the 2017 tax year, do you remember?

If you will get bracket creep, maybe you don’t want to wait to take only RMDs, consider distributing from your IRA now while you have time, to level your taxes out from year to year, so that you minimize them over your lifetime. Lots of people defer, defer, defer because that’s what they did in accumulation phase, and then they get hit in the mouth at RMD time, and they can’t do a thing about it.

Here is an RMD calculator. RMD Calculator

@ochotona Thanks for the info. I checked my estimated RMD for 2027 at your link and it is still well below what I have been taking out. Yes, I was in the 25% marginal rate before. Hard to predict the future though. Bird in the hand . . . .

Not a finance person here, but I had to handle my dad’s $$ for a few years until he passed. He had to have RMDs on his IRA, and some years, I had to pull more money than the RMD out of his IRA or his Roth for expenses.

The tax issue is obvious, but you have to pay taxes on untaxed IRA money at some point!
People act like that’s the end of the world – but I figured my dad got the tax-free benefits for years, and it comes due at some point. And you can always invest the money – it’s not gone, it’s not lost. But people act like it’s a tragedy!

But other than the tax issue, I noticed that some years when I had to pull out more money than usual for expenses from either the IRA or his Roth, that changed his Medicare monthly payments. All of the distributions (IRA, Roth–yes, Roth) counted as income regarding the calculation of his Medicare premiums, and his monthly Medicare payment went up a noticeable amount. Not a deal-breaker, but something to consider.

Another issue with holding off on IRA distributions – when my dad passed, we (kids) inherited his IRA along with the tax bill (inherited IRAs must be withdrawn within 10 years and the relative who inherits pays it). Yes, I inherited some money, but it’s doing a number on my tax bracket now and for the next few years. um, thanks?!?

Having said all of that, my own non-professional opinion is to start taking distributions on the IRA, especially if it doesn’t significantly change your tax bracket-- you got the tax free benefit, and by withdrawing, you’re not LOSING anything! And speaking as someone who inherited an IRA and its tax bill-- my dad got the tax break, and now I have the tax headache, and a higher tax bracket !! I’m keeping this in mind as I plan my “estate” and how to do IRA withdrawals – do I want people to inherit a tax bill because I didn’t pay taxes on my money? Not really.

One can make QCDs, which reduces taxable RMDs. One can also make a charitable organization or one’s DAF the beneficiary of an IRA and the final distrbution to them is not taxed.

Yes, the IRMAA limits. Another reason to level out IRAdistributions over time to avoid severe spikes due to RMDs

My opinion is to not chase the yield. The current 6.8ish % is only for 6 months. If inflation is going down, so will the new 6 month rate they establish in May. You would get a sense of where it is going by March. Say that the new rate in May is 4%. Your 1 year rate would be the average of 6.8 and 4 which is 5.2%. So the difference between your MM and I-bond would be about 1%. 1% of $10,000 is $100.