The Ins and Outs of Using Your Tax Refund to Purchase I Bonds

There are a few limitations that you need to know before purchasing these bonds. The bonds cannot be cashed in during the first 12 months after purchase. While you can cash in I Bonds after the first year, you will lose the most recent three months of interest payouts if you do so before the five-year anniversary of the purchase.

What You Need to Know Before Purchasing I Bonds

It is also important to understand that the inflation adjustment put in place for these types of bond only takes into account six months of data rather than an entire year. This means that you will always have a six-month lag baked into the I Bonds.

Buying before the April 30 deadline will lock in the 6.89% annualized rate for the next six months. With inflation all over the place over the last several months, it becomes more challenging to guess where this rate will fall on May 1 with the latest announcement. Experts are predicting that this new rate could be lower, bringing down the annualized rate for the I Bonds purchased between May and the end of October.

This I Bond rate is set two times during the year, once on November 1 and again on May 1. The rate takes into account the latest inflation data. The May 1 rate will reflect the data available for October, November, December, and January.

Current Inflation Picture

Complicating the picture this year in particular is the fluctuating inflation data. The U.S. Labor Department released the latest consumer price index data earlier in the month, demonstrating an increase of 6.4% in January. The inflation index increased 0.5% in January after going up just 0.1% in December.

Despite aggressive rate increases by the Federal Reserve, inflation continues to be an ongoing worry for the financial industry and the everyday consumer. The good news is that the rate of inflation has slowed down since it reached a year-over-year peak of 9.1% in June of 2022, representing the biggest increase in 40 years.

The rapid increase in inflation last year put I Bonds back in the spotlight. Buyers who purchased these bonds between May 2022 and October 2022 saw an annualized rate of 9.62% for the six-month period.

How to Purchase I Bonds Using a Tax Refund

It could not be easier to purchase I Bonds using your tax refund. You are allowed to purchase up to $5,000 of these bonds directly with the refund at the time that you file the 2022 tax return. All that you need to do is use Form 8888 alongside the tax return and also complete Part 2, requesting that the refund be applied to purchase paper bonds.

This $5,000 limit is in addition to the annual $10,000 limit per individual American. This means that a single individual could technically purchase up to $15,000 in I Bonds in one year. Married couples could purchase up to $25,000 of I Bonds in one year.

Your limit starts over again with the new calendar year. This means that you can still buy more I Bonds in 2023 if you purchased the maximum amount of I Bonds in 2022.

You can purchase Paper I Bonds in denominations of $50, $100, $200, $500, and $1,000. It should be noted that you may be sent more than one paper bond to fulfill the requested amount.

It is also possible to use just a portion of your tax return to purchase I Bonds. For instance, if you are getting a refund of $3,000, you could choose to take half as an I Bond while electing to take the remaining balance as a refund to your checking account.

Investors can also choose to purchase these bonds for other people. Using Form 8888, simply designate ownership or co-ownership to anyone that you choose.

When to Expect Your I Bonds to Arrive

Receiving the I Bond after the initial purchase is not instantaneous. The IRS will first process the tax return. You can accelerate this process by filing electronically rather than through snail mail.

The earlier that you file your taxes, the less likely that your I Bond will get caught up in the delays that often happen as Tax Day approaches. You should receive the bonds in the mail within three weeks of the issue date. The IRS is also warning that if you are splitting your refund between a direct deposit and an I Bond purchase, the deposit may arrive sooner in your account than the bond arrives in your mailbox.

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