Admit it: You've already broken your New Year's resolutions. A half-eaten chocolate truffle cake sits in your fridge, your new running shoes are still in the box, and you haven't saved a dime.
No question, resolutions are hard to keep. But if you're serious about saving money, consider starting with your tax refund. This year, you'll have a new option that could eliminate the temptation to spend your refund check. When you file your 2009 tax return, you can arrange to use all or a portion of your refund to buy inflation-adjusted Savings Bonds, or I Bonds.
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You don't need to set up an account at Treasury. You don't even need a bank account. All you have to do is fill out Form 8888 and tell the IRS how much of your refund you want to invest in I Bonds. You can have the rest deposited in a bank account, an individual retirement account or a combination.
The IRS has permitted taxpayers to split their refunds in up to three different accounts, including an IRA, since 2007. Adding a Savings Bond to the mix could appeal to savers who are looking to put aside some money but don't want to lock it up until they retire.
And right now, an I Bond provides a significantly higher return than other low-risk investments, says Daniel Pederson, author of Savings Bonds: When to Hold, When to Fold and Everything In-Between. I Bonds purchased between November 2009 and April 2010 pay an annualized earnings rate of 3.36%, vs. an average rate of 0.77% for a one-year certificate of deposit and 0.03% for the average money market fund.
In addition, I Bonds are exempt from state and local taxes, and federal taxes are deferred until you redeem your bond, Pederson says. Here are some details about the new I Bond savings program:
•I Bonds are sold in increments of $50, up to a maximum of $5,000 per Social Security number. Unless your refund is divisible by $50 to the penny, you'll need to include another account, says Melissa Labant, technical manager for the American Institute of Certified Public Accountants. For example, if your refund is $280 and you buy $250 in I Bonds, you'll need to designate another account for the $30 balance.
•The I Bonds will be issued in your name, or you and your spouse's name if you're married and file jointly, says Steve Hoffman, director of tax services for West Virginia University. You can't name a beneficiary or co-owner for I Bonds purchased with your tax refund. Treasury plans to add those options in time for the 2011 tax filing season.
•I Bonds purchased with your tax refund aren't available electronically. You'll receive paper I Bonds in the mail after the IRS has processed your tax return.
•Most tax software programs support the new option. Representatives from TurboTax, H&R Block, TaxAct and CompleteTax said their online and desktop products allow users to purchase I Bonds with their tax refunds.
About I Bonds
I Bonds consist of two components: a fixed rate that stays the same for the life of the bond, and an inflation rate that's adjusted every six months. If you purchase an I Bond between now and April, you'll receive a combined rate of 3.36% for the first six months you own the bond. The variable rate will then be adjusted to reflect the new inflation rate announced on May 1.
Pederson advises I Bond investors to focus on the fixed rate, because that's the rate you'll earn above inflation for as long as you own the bond. Right now, that rate is a miserly 0.30%. But if you expect inflation to run in the 3% range — or higher — an I Bond with a 0.30% fixed rate is still attractive, Pederson says.
Len Rosenthal, finance professor for Bentley University in Waltham, Mass., says I Bonds provide an easy and convenient way for average investors to protect themselves against the risk of inflation. While the recession has kept consumer prices from rising, he says, government spending will likely push inflation higher in the next few years.
However, I Bonds aren't appropriate for savers who may need the money in the next few months. You can't redeem an I Bond for one year after purchase unless you're the victim of a disaster, such as a tornado or hurricane. If you cash it in within five years, you'll forfeit the most recent three months' interest.
For more information about the I Bond program, go to www.treasurydirect.gov.
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