If you were planning to use your tax refund to buy the paper version of inflation bonds, you’re out of luck: That option has been eliminated.
The Treasury Department ended its tax-time savings bond program as of Jan. 1. The program was the last way to buy the paper version of I bonds, as Series I savings bonds are known. The bonds aim to protect savers against the rising cost of living by paying an interest rate linked to inflation.
Some people liked to give paper bonds as gifts, but others used the tax-time program because it let them buy as much as $5,000 in extra I bonds, beyond the allowed annual limit of $10,000 a person in digital bonds. (Couples filing jointly could buy a total of $25,000 in I bonds: $10,000 each, plus up to $5,000 with their refund.)
Now, all savings bonds are digital and must be bought online using the department’s TreasuryDirect system. And the extra $5,000 option has ended. “You may continue to purchase up to $10,000 of series I bonds in a calendar year,” the system’s website says.
You can still get your tax refund sent to your checking account, say, and then use the money to buy digital I bonds via TreasuryDirect. What’s going away is the ability to fill out a special form with your tax return and have the paper bonds bought with your refund.
The change was quietly announced with a website update last year, under the Biden administration.
The tax-time savings bond program was begun in 2010 to give tax filers, especially those with low and moderate incomes, a way to buy I bonds with their refunds. But the program “was costly and not frequently used,” the TreasuryDirect site says. On average, 35,000 tax filers bought paper I bonds each year, representing .03 percent of tax filers and less than 10 percent of I bond purchasers. Mailing paper bonds risked fraud, theft, loss and delays, the site says, adding that buying savings bonds online is “simple, safe and affordable.”
David Enna, founder of Tipswatch.com, a website that tracks securities that protect against inflation, said the government hadn’t widely publicized its new I bond purchase policy. Some tax filers are likely to be disappointed, he said, because a popular strategy was to overpay taxes during a tax year to generate a tax refund to buy the bonds the next spring.
The loss of the option to buy an extra $5,000 in I bonds will probably be unpopular among buyers, he said. The $10,000 annual cap, he said, is “too small,” because it takes years to buy enough bonds to generate significant interest.
I bonds, first issued in 1998, grabbed savers’ attention during the pandemic-induced inflation surge. In 2022, the interest rate on I bonds rose to well over 9 percent, far outpacing rates on other safe options for cash.
The low-risk bonds pay a rate made up of two parts: a fixed rate, set when the bond is issued and staying the same for its 30-year life, and a variable rate that changes every six months — on May 1 and Nov. 1 — based on the Consumer Price Index. The Treasury Department applies a formula to combine the two parts into an overall rate.
Rates on I bonds have fallen to more pedestrian levels as inflation has eased. I bonds bought from Nov. 1, 2024, through April 30 are paying an annualized composite rate of 3.11 percent.
That means the bonds aren’t a compelling way right now for parking short-term cash, said Jeremy Keil, a financial planner near Milwaukee who tracks the bonds, because safe alternatives, including high-yield savings accounts and certificates of deposit, are paying 4 percent or higher.
But the bonds remain attractive for people seeking a hedge against inflation over the longer term, he said. The current fixed rate on I bonds is 1.2 percent, one of their highest in recent years. Holders will also get a variable rate tied to inflation, he said. (When rates reset in May, it’s likely that the base rate will stay about the same and the variable rate will increase, Mr. Keil said).
Here are some questions and answers about I bonds:
What else should I know about I bonds?
Interest on the bonds is exempt from state and local income taxes. You’ll owe federal tax on the interest earned, but you can wait to pay it until you cash the bond, if you want.
You can’t redeem the bonds until you have held them for at least a year. And if you cash them in before five years, you’ll forfeit the last three months of interest as a penalty.
What should I do if I have paper I bonds?
You can hold them until you’re ready to cash them in (at a bank, if you can find one that still does it, or by mailing them to the Treasury Department). Or you can convert them to electronic bonds using your online TreasuryDirect account.
Can I still buy electronic I bonds directly, using my income tax refund?
No. According to the I.R.S. Form 1040 instructions for 2024, “The program allowing for your refund to be deposited into your Treasury Direct account to buy savings bonds, as well as the ability to buy paper bonds with your refund, has been discontinued.”
Form 8888, which filers could previously use to direct refunds to buy the bonds, can be used to split a direct deposit refund into two accounts, like a checking or savings account or even an individual retirement account. But it cannot be used to deposit a refund into a TreasuryDirect account, said a Treasury Department spokesman.
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