Tuesday, January 26, 2010

Turning Your Tax Refund Into an I Bond May Be a Smooth Move

USAToday.com:

Admit it: You've already broken your New Year's resolutions. A half-eaten chocolate truffle cake sits in your fridge, your new running shoes are still in the box, and you haven't saved a dime.

No question, resolutions are hard to keep. But if you're serious about saving money, consider starting with your tax refund. This year, you'll have a new option that could eliminate the temptation to spend your refund check. When you file your 2009 tax return, you can arrange to use all or a portion of your refund to buy inflation-adjusted Savings Bonds, or I Bonds.

You don't need to set up an account at Treasury. You don't even need a bank account. All you have to do is fill out Form 8888 and tell the IRS how much of your refund you want to invest in I Bonds. You can have the rest deposited in a bank account, an individual retirement account or a combination.

The IRS has permitted taxpayers to split their refunds in up to three different accounts, including an IRA, since 2007. Adding a Savings Bond to the mix could appeal to savers who are looking to put aside some money but don't want to lock it up until they retire.

And right now, an I Bond provides a significantly higher return than other low-risk investments, says Daniel Pederson, author of Savings Bonds: When to Hold, When to Fold and Everything In-Between. I Bonds purchased between November 2009 and April 2010 pay an annualized earnings rate of 3.36%, vs. an average rate of 0.77% for a one-year certificate of deposit and 0.03% for the average money market fund.