Receiving Your Tax Refund in Savings Bonds

by Thursday Bram on 4 March 2011 4 comments
Photo: arosoft

As you prepare your tax return this year, you have an interesting option. You can opt to receive part of your tax refund as U.S. Savings Bonds. The process is relatively simple. Form 8888 (PDF) from the IRS allows you to allocate how you will receive your refund. You can have your refund directly deposited into a bank account, mailed to you as a check, or invested directly into savings bonds. You can also divide your refund between these options however you'd like. It's an easy process. The real question is should you invest part of your refund into savings bonds.

The bonds in question are Series I Savings Bonds, which the U.S. Treasury sells for face value. You can redeem such a bond, plus the accumulated interest on it, after twelve months have passed — although if you redeem a bond you've held less than five years, you'll give up three months worth of interest. Series I Bonds earn a combination of a fixed rate and an inflation rate. The fixed rate stays the same for the life of the bond, while the inflation rate changes every six months. New rates are set every November and May. The last fixed rate set (November 2010) is 0.00 percent, which means bonds bought before next May will be relying entirely on their inflation rate for income. You can see a list of recent rates on the U.S. Treasury's website. (See also: While Waiting for Rates: I-Bonds)

The Benefit of Automatic Savings with Bonds

Sarika Abbi, who works with the D2D Fund to encourage savings for low-income consumers, points out that this approach provides a way to automatically save money.

The nice thing is a taxpayer can consider saving just a portion of their refund with bonds, allowing them to use the remainder to pay bills, meet spending needs, or save in other saving or investment vehicles. For individuals who don’t have access to savings, it’s a great way to begin setting some aside for the future, without the requirement of a bank account. They also offer a competitive rate in comparison to comparable savings products (traditional savings account and one-year CDs). There are no fees associated with buying or redeeming bonds and they have a low entry point: only $50. This makes them a very accessible product for many households.

Tax-time saving bonds are Series I Savings Bonds, which are inflation-protected. This means your savings bond never lose value. They are also very safe investments — your principal is protected and when you redeem them you will receive your entire principal as well as any interest earned. They are a nice long-term vehicle (mature in 30 years) but are accessible one year after purchase if a family faces an emergency or need for the vehicle. It is also a good savings vehicle for individuals who want to set money aside for their children, grandchildren, or other loved ones. And there is a tax break if used for education purposes.

It's truly an easy way to build up savings, and the fact that it takes a little more work to cash in a bond than it takes to just transfer money out of a checking account means that there's an additional barrier to using your savings for purchases that aren't really all that necessary. There is a maximum amount that you can invest in Series I bonds every year — $5,000 — but a taxpayer can request as little as $50 in bonds if that's all someone wants to put aside.

Is Getting Your Refund in Savings Bonds Right for You?

It's true that savings bonds, especially at current interest rates, aren't the ideal investment for everyone. But when you consider that you can use them as a savings vehicle rather than an investment opportunity, you may find that putting part of your income tax refund towards savings bonds makes sense. You may find that you can earn at least as much interest as you can through a savings account at your bank. And if you're starting to plan for college for a little one, a savings bond offers other benefits over the typical bank account.

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Andrea Karim's picture

Now, if only I could figure out a way to get the government to give me a refund.... :)

Guest's picture
Harm

Yeah, yeah, yeah....never lose value....
UNTIL inflation hits 6 or 7% (hello? health care?)
and the government "CPI" says inflation is non-existent.....
(My cynicism is directed more at the government, not the blog so much)

Guest's picture
tiggershadow

I used the savings bonds option for part of my refund when preparing my taxes this year with online software, and it worked well except that when I received a late 1099-DIV statement and had to file an amendment my tax return, the software didn't know how to handle the savings bonds and wouldn't allow me to file the amendment electronically, flagging the figures I had previously entered for the bonds as errors.

Guest's picture
MoneyIsTheRoot

@Harm - I couldnt agree more, inflation is going straight up, and will far outpace the interest earned on these bonds. Take the refund and invest in something that earns a higher rate of return. Dividend stocks?

www.moneyistheroot.com