Should you use your refund to buy bonds?

You can buy extra lowrisk federal inflation bonds using your tax refund. But is it wise to do so this year?

That depends on your goals, financial advisers say. Inflation has cooled somewhat, so rates on I bonds are lagging the impressive levels of last year. If you’re simply looking to maximize the return on your cash for a year, other alternatives — high- yield savings accounts, certificates of deposit or even Treasury bills — might be more attractive.

“You ought to find the best rates you can,” said Jeremy Keil, a certified financial planner in New Berlin, Wis.

But if you’re seeking a safe investment with inflation protection over years or even decades, it may still make sense to buy some I bonds with your refund. “I think I bonds are still worth purchasing,” Ken Tumin, founder of Depositaccounts. com, part of Lendingtree, said in an email.

Once obscure, government I bonds have enjoyed renewed popularity over the past two years as inflation has surged. The lowrisk bonds pay a rate composed of two parts: a fixed rate for the 30- year life of the bond, once issued, and a rate that can change with inflation ( as measured by the Consumer Price Index) every six months, on May 1 and Nov. 1. The Treasury Department applies a formula that melds the two into a combined rate.

For a time last year, the bonds paid an annualized 9.62%, leading to a surge in purchases. Bonds purchased through the end of April will earn an annualized 6.89%, or about 3.45% for the first six months of ownership.

You can’t sell I bonds until you’ve owned them for at least 12 months. And it’s uncertain what rate you’ll earn after the first six months since the bonds’ inflation rate may change on May 1. ( The Treasury Department announces the rate on the first business day in May, but finance experts often make estimates based on monthly inflation data reported in mid- April.)

Buying before May 1, however, would at least lock in the current 0.4% fixed- rate component for those bonds. The fixed rate had been zero for more than two years, before rising in November.

Tumin, however, estimates that the overall 12- month return for an I bond purchased before May will be at least 4% — not bad, especially since there are also tax benefits. Federal income tax on the interest can be deferred until you redeem the bonds. Interest on I bonds is exempt from state and local income taxes and, if you qualify, from federal income tax when used to pay for higher education.

You can buy up to $ 10,000 in electronic I bonds per person in a calendar year, with an online account at

Treasurydirect. gov. Plus, you can buy up to $ 5,000 more in paper bonds per tax return, using your federal income tax refund. ( A couple filing a joint return can buy up to $ 25,000 per year.) You can’t redeem the bonds for at least a year, and if you sell before five years, you’ll forfeit the last three months of interest.

People can do better, Keil said. Twelve- month CDS, for example, are available with rates of 4.5% or higher. Also, he said, some U. S. Treasury bills, short- term debt issued by the government, are paying around 5%, and there are no limits on the amount you can buy.

How do I purchase I bonds with my tax refund?

AFile the IRS’ Form 8888 with your tax return to buy paper I bonds. The bonds will be mailed to you when the IRS processes your return. According to TreasuryDirect, the issue date on your bonds — which determines their interest rate — will be the first day of the month in which Treasury’s service center receives payment from the IRS. So if the center receives your order anytime in April, the issue date will be April 1 — in time to receive the current annualized rate of 6.89%.

The tax filing deadline is April 18, but Keil advised submitting your return by April 1 if you want to buy I bonds, to make sure that you get the current rate.