Series I Savings Bonds: The Lowdown on Buying I Bonds With Your Tax Refund

Let’s cut to the chase: Series I Savings Bonds—those mysterious creatures everyone suddenly loves to chat about at the watercooler (or, let’s be honest, over text)—are having a bit of a moment. Why? Simple. They’re low-risk government savings bonds practically designed to laugh in the face of inflation. And here’s the kicker: you can actually snag these beauties with your tax refund. It’s a clever way to keep your cash from getting eaten alive by rising prices. Who says tax season can’t be a little exciting?

I bonds are brought to you by none other than the U.S. Department of the Treasury—yep, the same folks who handle the IRS. These bonds make a cameo appearance every tax season, offering a nifty little trick: when you file your federal tax return, you can opt to funnel a chunk (or the whole darn thing) of your refund into I bonds. This route lets you waltz right past the usual $10,000 per-person annual digital cap, bumping your maximum up to $15,000. Extra credit for playing the system smart.

But, hands up if you’re wondering: should you actually use your tax refund for I bonds this year?

Back in 2022, I bonds were the belle of the savings ball—with a jaw-dropping 9.62% interest rate, it almost felt like free money. (I don’t know about you, but my other investments were feeling pretty jealous.) At that time, finance savvy folks like David Enna, mastermind behind TIPS Watch, couldn’t stop recommending them.

Fast forward: today’s I bond rate sits at a still-pretty-nice 6.89%. The deal isn’t quite as dreamy as before, but it definitely hasn’t turned into a pumpkin yet.

PROS AND CONS OF PURCHASING I BONDS TODAY

Let’s be real: with inflation (thankfully) backing off a bit, and certificates of deposit (CDs) plus high-yield savings accounts suddenly acting all competitive, I bonds aren’t the only players in town. Randall Watsek—financial whiz over at Raymond James—points out in his 2023 crystal ball that I bonds still often beat out those flashy 3% high-yield accounts, but there’s plenty to weigh before you jump in headfirst.

Here’s one biggie: “Your funds will be locked up for a year,” says Watsek. So if you’re short on patience (guilty), that’s something to consider. And if you tap out before five years, you’ll need to kiss goodbye to three months’ worth of interest. Ouch.

Another twist: that 6.89% interest rate you’re eyeing? It’s a blend of two parts—the “variable rate,” which gets a facelift every six months depending on how wild inflation’s feeling, and the “fixed rate,” which is basically set in stone at the time you buy your bond.

Twice a year (May and November), the Treasury peeps tweak the rates based on recent inflation numbers. So if you buy an I bond at 6.89%, you’ll pocket around 3.45% over the first six months, then it resets to whatever new rate is announced. The takeaway: I bonds are one of the few ways to make sure inflation doesn’t eat your savings for breakfast. (Want geek-level details? Here’s a guide to how I bonds work.)

Sure, early withdrawal rules can scare off commitment-phobes. But if you’re a set-it-and-forget-it type, and you need a safe place for long-term savings, these things are hard not to love.

“Having that inflation protection,” says Watsek, “is beneficial for conservative investors.”

Benefits of I Bonds

• 5.27% annualized interest rate
• Specifically structured to guard savings against inflation
• Tax-deferred interest accrual
• Interest is exempt from state and local income taxes
• Federally tax-exempt if used for qualified higher education expenses
• Relatively liquid compared to many other government investments
• 30-year maturity period
• Fully backed by the U.S. government

Drawbacks of I Bonds

• Limited long-term earning potential versus potentially riskier investments
• Annual purchase cap of $15,000 per person—$5,000 of which must be bought with your tax refund
• Cannot redeem within one year except under certain emergencies
• Lose three months of interest if you redeem before five years
• Not as instantly accessible as a savings account

THE I BONDS TAX REFUND LOOPHOLE

Here’s a secret handshake for you: the only way to hit the magic $15,000 annual I bond limit per person is via your tax refund. Normally, you’re looking at a $10,000 annual ceiling for digital I bonds—but Uncle Sam lets you buy up to $5,000 in good old-fashioned paper I bonds, if you use your refund, and only then. (After 2011, banks wiped their hands of paper I bond sales, making the IRS your ticket in.)

Hot tip: You can swap paper I bonds for digital versions for free, without blowing your annual limit or your interest rate. Just don’t expect to go from digital back to paper—Treasury’s rules are stricter than a no-nonsense librarian!

HOW TO BUY I BONDS WITH YOUR TAX REFUND

This part’s actually less tricky than assembling IKEA furniture. Use IRS Form 8888 to send all or part of your federal refund into paper I bonds. Not feeling old-school? You can direct your refund straight into digital I bonds via your TreasuryDirect account (yep, you’ll need to open one if you’re a first-timer—just another online account to add to your collection).

Form 8888 is basically a choose-your-own-adventure: “Part I” lets you split up your refund between accounts (including TreasuryDirect, of course). Want to get your hands on physical, paper I bonds? Skip down to “Part II”; anything you send here counts towards that $5,000 paper cap. Leftover refund? Ship it elsewhere or get a good old-fashioned check—just like grandma used to send.

Newsletter
Level Up Your Financial Knowledge with Dollar Scholar

Receive essential money tips, expert advice, and even cute animal pictures direct to your inbox—weekly. Sign up and suddenly, you’re the savvy friend everyone wants tax advice from (plus, you’ll get those animal pics—who can resist?).

By clicking “Sign Up,” I consent to receive newsletters and promotions from Money and partners. I also accept Money’s Terms of Use and Privacy Notice, and agree to the processing of my personal data. Sign Up

MORE FROM MONEY:

• Tax Deadlines 2023: Dates to Know
  Tax Deadlines State Federal Extension
• Why Your Tax Refund May Be Smaller This Year
  Why Is My Tax Refund Lower
• How Big Is Your Tax Refund? Many Taxpayers Are Unsure
  Tax Refund Amount Owe IRS Survey