How to Earn a 7% Return on Your Tax Refund

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If you haven’t heard, there is a safe way to earn outsized returns on some of your money if you buy Series I savings bonds today. We reported on this bonanza in “This Risk-Free Bond Now Pays 7.12%.”

However, those who expect to get a tax refund this year have an opportunity to get in on an even bigger slice of the action.

Generally, Americans are limited to buying $10,000 in electronic Series I savings bonds, also known as “I bonds,” each year. However, you can purchase an additional $5,000 worth of paper I bonds each year if you use your refund to purchase them.

In short, using this technique allows you to nab a total of up to $15,000 in I bonds in 2022 instead of $10,000.

How Series I savings bond interest rates work

Before you take the plunge, it is important to note that the 7.12% interest rate that Series I savings bonds currently are paying is not permanent.

That rate applies to bonds purchased through April 2022, and it will be good for the first six months that you own such bonds.

Twice a year, the federal government sets two new interest rates for I bonds. The current 7.12% rate — which reflects a variable inflation-based rate of 7.12% and a fixed rate of 0% — debuted in November 2021. In May 2022, Uncle Sam will announce new rates, which will apply to I bonds purchased from May through October 2022.

Will the new inflation-based rate be higher or lower than the current 7.12%? It all depends on the rate of inflation itself, which has been running notoriously high. The hotter inflation runs, the higher the new inflation-based rate for I bonds will be.

How to buy Series I savings bonds with your tax refund

To buy Series I savings bonds with your tax refund, you must complete Part II of IRS Form 8888 and include it with your tax return. (If you use tax software or a tax professional, the software or pro can complete the form for you.)

You can buy I bonds in $50 increments this way, and they will be mailed to you after the IRS processes your tax return.

For more details, see the TreasuryDirect.gov webpage about using your refund to buy paper bonds.

To learn more about the pros and cons of I bonds, check out:

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