Turning a Refund into Savings Bonds

In the past, the IRS has also allowed taxpayers to split tax refunds between as many as three different accounts. This year, you'll be able to convert that refund into inflation-adjusted savings bonds, known as I Bonds.

If Uncle Sam owes you money when you file your 1040 this year, you have several options. The most obvious one is to take the cash, whether it’s in the form of a check or as a direct deposit into your checking account. For the past couple of years, the IRS has also allowed taxpayers to split the refund between as many as three different accounts, including an IRA. This year, for the first time, you’ll be able to convert that refund into inflation-adjusted savings bonds, known as I Bonds.

To get all or part of your refund in I Bonds, all you need to do is use IRS Form 8888 to designate how much of your refund you want put into bonds. The maximum amount you can buy is $5,000 and you must purchase an amount that’s a multiple of $50. Any cash that’s left over after you buy the I Bonds must be deposited into another account. The bonds will be in your name or, if you file a joint return, they will be in yours and your spouse’s name. The bonds will be in paper form and will be mailed to you after the IRS processes your return.

The interest rate on I Bonds is made up of a fixed rate, which stays the same for the life of the bond, and a variable rate, which fluctuates with the rate of inflation. I Bonds bought from now through April 30 are currently paying 3.36%, a much better rate than other low-risk investments like money market funds or certificates of deposit. Another plus — interest on I Bonds is free from state and local taxes and the federal tax is deferred until you cash them.