U.S. savings bonds are considered one of the safest options for saving. You can utilize your tax refund to purchase savings bonds and turn them into a secure and profitable investment. In this article, we will learn how to convert your tax refund into savings bonds and benefit from them in the best possible way.
Why Buy Savings Bonds?
If you’re like many taxpayers, you’ve probably been planning how to spend your tax refund since filing your tax return and realize you are entitled to a refund. However, you may be one of those naturally saving individuals. Savings bonds are among the safest options for saving.
Unlike the stock market and other types of investments, you simply cannot lose the money you invest in government savings bonds unless the United States ceases to exist effectively. Bonds are backed by the “full faith and credit” of the government.
The U.S. Treasury offers a series of savings bonds to purchase with your tax refund. These are the bonds that do not lock in the same interest rate for the life of the bond. As the economy fluctuates, the interest rate on the bond will change accordingly.
Interest on Savings Bonds
U.S. savings bonds come with a fixed interest rate for 30 years and an adjustable interest rate that is adjusted every six months in May and November. The interest is adjusted based on inflation.
The inflation adjustments are based on changes in the Consumer Price Index. Interest is paid on the first day of each month and is compounded semi-annually.
The IRS has added a joint ownership option, a change since this program was first introduced in 2010, as well as the provision allowing you to purchase bonds in the names of others. Unlike other investment options, a minor child can own savings bonds.
Easy Purchase Using IRS Form 8888
Purchasing bonds using your tax refund is very easy. You can submit IRS Form 8888 with your tax return. Historically, this form has been used to distribute refunds to various bank accounts or retirement accounts. The IRS modified the form in 2010 to add the second part that provides the savings bond option.
You are not required to register online at Treasury Direct, the electronic bond purchasing portal, unless you wish to. You do not have to direct your entire refund to purchase savings bonds.
Feel free to spend a little money on bonds and deposit the balance into your bank account via direct deposit or request that the IRS send a traditional paper check for the remaining amount after the purchase. You can enter your bank account numbers and routing information on Form 8888 if you choose the direct deposit option, just as you would if you were not purchasing bonds.
Receiving the Bonds
The bonds will be delivered to you in paper form; the IRS will send them to you by mail. But you are not required to keep them in a safe place or remember where you put them for many years because you can go to Treasury Direct and use the SmartExchange option to convert them to electronic form after receiving them.
Your bond’s issue date will be the first day of the month in which the IRS sends the money to the Treasury Retail Securities Site.
Taxes on Bond Earnings
Of course, the interest on the bonds you earn is typically subject to tax, although it generally isn’t until you cash the bonds in. It may not be taxable, depending on what you do with the money, which is another reason why savings bonds are a smart investment.
First, the interest is exempt from state or local taxes, which is a good advantage if you live in an area with high state or local tax burdens. For federal taxes, you don’t necessarily have to wait until you cash in to report and pay taxes on all the interest that has accrued over time.
You can
Doing this annually if it’s better for you, like in the year when your tax rate is relatively low and you think you will earn more in the future. This portion of the interest will not be taxed when you cash in your bonds later.
The interest you use to pay for qualified education expenses is tax-free even at the federal level for bonds purchased after 1989. Of course, there are some rules. The buyer of the bond must be at least 24 years old. But this can be a great, safe, and easy way to save for your child’s education.
Keep these bonds for a long time
You will lose three months of interest that the bonds earned if you cash them in during the first five years, although there is no penalty after that time. And you must hold the bond for at least one year, so you should be somewhat confident that you won’t need the money during the next 12 months.
The government provides exceptions to these rules for certain emergencies, such as if you live in a nationally declared disaster area. Treasury Direct provides a list of exemptions on its website.
The modest interest paid by these bonds may not make you a millionaire. But these bonds can provide a good and stable foundation for your other investment plans.
Frequently Asked Questions
How much can I buy in I Bonds with my tax refund?
You can purchase I Bonds starting at $50 using your tax refund and up to $5,000 (in increments of $50). These are paper bonds and you can redeem them at almost any financial institution.
If I choose to buy bonds, do I have to use all of my tax refund this way?
No, you do not have to use all of your tax refund to purchase bonds this way. You can direct the IRS to use some of your refund for I Bonds, and the agency will send the remainder by direct deposit or check.
Source: https://www.thebalancemoney.com/turn-your-tax-refund-into-savings-bond-4178992
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