How to Increase Earnings on Your Tax Refund
It’s always nice to get a big income tax refund from the IRS and/or your state’s tax board. The big question is what will you do with this money? A lot of people like to spend it on something frivolous. It feels a little like free cash from the government, so it can be easy to seem like you’re just playing with house money. However, it is money that you rightfully earned. It was originally pulled straight out of your income after all.
Many people know it’s smart to reinvest their tax refunds into something more financially meaningful. Perhaps it’s paying down a high-interest debt like a car loan or credit card, or paying for home improvements. Some may opt to invest the money in stocks, bonds or crypto.
Taking Your Tax Refund as a Series I Savings Bond
There is another interesting option provided by the IRS. When you file your tax return, you can opt to take the refund in the form of a Series I Savings Bond—otherwise known as an inflation-indexed (or inflation-adjusted) savings bond. The IRS has been allowing taxpayers the option to invest tax refunds into Series I Savings Bonds since 2010.
Even if you have already filed your taxes by Monday’s standard filing deadline, it may not be too late to switch your collection option if you are interested in a Series I Savings Bond instead of cash. Consult with your tax advisor or contact the IRS directly. Like last year, tax return processing and tax refund payments will likely be slow again in 2022. Also know that you can select to receive part of your tax refund in cash and part as a Series I Savings Bond.
Attractive Rates to Hedge Against Inflation
Series I Savings Bonds have become popular because of the high inflation rates we are experiencing. The composite rate for the bond is updated every six months and the current rate of 7.12% is good through the end of April. After that, it may change again. The rate you receive for your bond investment is based on when you invest, so that’s why it’s a good idea to invest now while the rate is abnormally high. To put it in perspective, the rate as of May 2021 was 3.54% before it was basically doubled in November 2021.
There is a very good chance the rate will go up even more this May. Some experts anticipate a new rate over 9% since inflation has risen so dramatically. So, even if you didn’t choose the option to receive your tax refund directly as a Series I Savings Bond, you can still take some or all of the cash you receive and invest it in one of these inflation-protected bonds.
Pros and Cons of Series I Savings Bonds
These inflation-indexed bonds are very safe bets as they are designed to protect against high inflation rates. If you don’t need the money you are getting back for your tax refund, this type of investment may make a lot of sense. Or, there may be something else you can and should consider. There are a few drawbacks to inflation-indexed bonds like Series I Savings Bonds and Treasury Inflation Protected Securities (TIPs). Be sure to read my past article for more details on this subject. Click here to read.
The main drawback to these bonds is that your money is tied up for a longer period. You cannot pull any funds from the bond for at least a year, and any withdrawals before five years may be subject to investment penalties or lost interest. There is also $10,000 investment limit per individual tax ID.
As with any investment option, there are pros and cons to understand. Talk with your financial advisor to make the right financial decisions. If you are looking for expert financial guidance and strategic planning for your taxes, business and/or investments, contact Illumination Wealth today to schedule an introductory consultation.