The IRS is offering something new this year, something that encourages saving.
When you file your 2009 return you can arrange to have some or all of your refund used to purchase Inflation-Adjusted Savings Bonds, commonly called I-Bonds.
The process is easy. Simply fill out IRS Form 8888 (download at: www.irs.gov) and indicate how much you want invested in I-Bonds. The remainder can be deposited in your bank account, in an approved IRA account (the regular IRA, Roth IRA and SEP-IRA but not the SIMPLE-IRA) or both an IRA and a bank account.
The Interest Rate
Cautious savers tend to like I-Bonds. They are currently paying 3.36%. Compare that with money market funds which are yielding approximately 0.01% to 0.05%.
Key Points
1) I-Bonds are exempt from state and local taxes.
2) Federal taxes are deferred until you redeem your bonds.
3) They are not expensive - the paper version starts at $50.
4) They are sold at face value.
5) The maximum that can be purchased per Social Security number in one calendar year is $5,000.
6) Under the IRA plan, you must purchase I-Bonds in increments of $50.
7) Under the IRS arrangement, you cannot purchase I-Bonds electronically. Instead, you will receive paper bonds in your mailbox - after your return has been processed.
8) The paper bonds show the faces of Americans who have made significant contributions:
| $50 | Helen Keller | | $200 | Chief Joseph |
| $75 | Dr. Hector Garcia | | $500 | George C. Marshall |
| $100 | Martin Luther King, Jr. | | $1000 | Albert Einstein |
| | | | $5000 | Marian Anderson |
9) Bonds purchased with your tax refund will be issued in your name. Or, if you're married and filing a joint return, in you and your spouse's name.
How They Work
I-Bonds come with two interest rates. One is a fixed rate that remains fixed for the life of the bond. The other is an inflation rate which is adjusted every six months. The variable rate portion is adjusted on May 1 and November 1.
These bonds provide a way to protect investors against inflation. Although the recession has pretty much kept inflation at bay, many experts believe that with the heavy government spending, inflation could move up.Caution
Don't think of I-Bonds as you do money market funds. You cannot redeem them until one year after purchase. (An exception is made for victims of major disasters, including floods, mud slides, tornados, hurricanes, earthquakes.)
When you cash them in you will receive the purchase price plus accrued interest. However, if you cash them in within five years, you will lose the last three month's worth of interest. This is to encourage long-term savings.
General details: www.treasurydirect.gov
Tax refund details: www.treasurydirect.gov/indiv/research/faq/faq_irstaxfeature.htm#refund
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