What you need to know about buying additional Series I paper bonds with a tax refund
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If you’re trying to maximize your annual Series I bond purchase limit, your tax refund gives you the opportunity to buy even more.
However, you should first consider your goals and weigh the alternatives, experts say.
An inflation-protected and near-risk-free investment, I bonds currently pay 6.89% per annum on new purchases made through April 2023. third highest bid since its introduction in 1998.
While the annual e-I-bond purchase limit is typically $10,000 per person, you can buy another $5,000 tax-refunded paper I-bonds.
Buying tax-refunded I paper bonds can make sense if you want to buy as much as possible, explained Ken Tumin, founder and editor of DepositAccounts.com, a website that tracks i bondsamong other assets.
Bond interest has two parts: a fixed rate that can change every six months for new purchases, but remains the same after purchase, and a floating rate that changes every six months depending on inflation. TreasuryDirect announces new rates every May and November.
But with inflation falling, Tumin said bond investors “might be a little disappointed in May,” noting that the compound rate could fall below the last three updates – 6.89% in November, 9.62% in May 2022 and 7. 12% in November 2021. respectively.
Treasuries, High Yield Savings – A Smarter Alternative
As the Federal Reserve continues increase in the target rate on federal funds, other assets have become more attractive, experts say.
“No one should be buying tax-refundable I bonds,” unless the purchase is part of a long-term strategy to lock the current flat rate at 0.4% above inflation, said Jeremy Keil, a certified financial planner at Keil Financial Partners in Milwaukee.
For short-term targets, Cale points to assets such as Treasuries, high-yield savings accounts, or certificates of deposit that have seen rates rise over the past year.
It’s very easy to get over 4% from an online savings account right now.
Founder and editor of DepositAccounts.com
“It’s very easy now to get over 4% from an online savings account,” Tumin said, noting that rates are “the highest in more than a decade.”
He said short-term CDs are paying higher rates than long-term CDs because many institutions expect the Fed to start cutting rates in about a year.
Disadvantages of paper bonds
Cale said it’s also important to consider the downsides of buying paper I bonds tied to your tax return.
“You don’t have much control over the timing of paper bond purchases, so don’t expect to get the current 6.89% rate unless you file well before the deadline,” he said.
Moreover, paper bonds I must be converted into electronic form before redemption. “It’s a long process,” he said. “He’s not liquid at all.”