As inflation approaches 8.5%, iBond hacks tax returns and more
US inflation has hit 8.5% in March over the past 12 months – the biggest 12-month rise since “Falcon Crest” opened on CBS Friday nights after “Dallas” on December 1981.
Gas prices rose only 48% in March, contributing to the volatile perception that consumers have about their wealth and the health of the US economy.
Oddly enough, the IRS has a form of inflation play for savings, some late filers still have time to consider.
We are close to the April 18 deadline for filing federal income tax returns, Michigan returns and the City of Detroit and other communities.
Although most people have never heard of this tax tip, taxpayers use Form 8888 to use at least part of their federal income tax refund to buy inflation-indicator savings bonds directly when they file their federal tax returns.
True, until inflation began to heat up, most people heard more about bitcoin than i-bonds.
Now, iBands have been paying the highest inflation-adjusted prices since their introduction in September 1998, which makes sense given that consumer prices have not risen so much in almost 40 years.
Savings began to sharply double in November, when the annual rate of new inflation-index savings bonds touched 7.12% for a six-month period.
What does the I bond look like next to the CD?
IBond rates are much higher than the rates you are getting on bank deposits.
According to Bankrate.com, the average one-year deposit certificate now offers a return of 0.22%.
According to bankrate.com, savers who shop around can now find top-yielding CDs at 1.25% compared to 0.67% a year ago.
I bond rates are, unfortunately, not easy to understand.
That 7.12% annual I bond rate applies to the first six months that you purchase I bonds from November 1, 2021 to April 30, 2022.
The higher rate also starts for I bonds purchased before November 1, 2021. A higher 7.12% annual rate will vary from month to month when you start the bond. Again, this applies to the six-month window.
Sales of i-bonds are hitting record highs. I-bond purchases reached $ 1.31 billion in November 2021, $ 3.04 billion in December 2021, $ 3.538 billion in January, $ 1.246 billion in February and $ 1.378 billion in March, according to the government’s monthly public debt statement.
In contrast, early last year, savings bought $ 249 million in I bonds in January 2021.
According to Pederson, I bonds have been selling series EE savings bonds for $ 100 to $ 1 over the past five months. (The Series EE rate for bonds purchased from November to April 30 is only 0.1%; however, bonds, if kept for 20 years, are guaranteed to double in value, so long-term savers will receive a significantly higher rate.)
And rates are likely to be higher – creating more mania for the I Bond story.
The latest inflation data allow predictions of where I bond rates will go in the future.
According to Daniel Pederson, a Monroe-based savings bond expert and founder, the annual rate announced on May 1 is likely to be around 9.6% over a six-month period. www.BondHelper.com.
Again, the upcoming I bond rate is valid for up to six months for purchases starting May 1st. Do not worry if you have already bought I bonds, however, you will also get a new higher rate for a period of six months.
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How do I mix bonds and tax refunds?
Believe it or not, taxpayers can assign a tax refund to I bonds if they use Form 8888. Note the instructions that you can use at least part of your refund to buy up to $ 5,000 on paper or electronic I bonds. (You can not use Form 8888 if you are trying to claim a refund through “Injured Spouse Allocation”.)
If you have a $ 6,000 refund, for example, you can buy only $ 5,000 on I bonds and deposit the rest directly elsewhere.
The same form also allows you to make a refund or a direct deposit on two or three accounts in a bank or other financial institution, including a mutual fund or brokerage account.
When Pederson filed his tax return electronically in March, he included Form 8888 to use some of his refund money to buy I bonds.
“I have not yet received the paper bonds,” Pederson said.
When he gets them, he is going to pay a lot of attention on the issue date to see what rate he starts first. He continued to seek the rate before it touched May 1, the rate given when he filed his return.
It is not surprising that his tax experts did not see the flood of taxpayers using Form 8888 to buy I bonds.
What issue date do you get?
The Internal Revenue Service states that I bonds will not be issued until the agency has completed your tax return.
The IRS said that if there were any changes in the actual refund amount, the refund process would have to be completed.
Instructions for Form 8888 indicate that I bonds will not be issued, for example, if your refund is reduced due to a math error. If your federal income tax refund is offset for any reason to cover unpaid debt to state and federal agencies, iBonds will not be issued and the refund will be sent to you in the form of a check.
The amount you buy on I bonds through your tax refund must be in multiples of $ 50 or the request will be rejected. Bond request for $ 438 will be rejected. In this example you need to request $ 400 on I bonds and take the remaining $ 38 elsewhere by direct deposit.
What’s the big deal about buying bonds with a tax refund?
I bond purchases each year have dollar limits. The tax refund route allows you to purchase up to $ 5,000 on I bonds above other limits.
The annual limit on I bonds is $ 10,000, which can be purchased per person per calendar year. You can buy savings bonds at www.TreasuryDirect.gov and keep them in your online account.
You can no longer buy savings bonds in person at banks.
Paper I bonds are only available if you have paid your income tax refund or a portion of Form 8888 I bonds when you file your tax return.
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What about old I bonds?
To buy these new bonds is to cash out the i bonds that someone bought 15 years ago or the last thing they need to do.
The reason? Some old bonds still pay a lot more than the new ones.
I bonds purchased before November 1, 2001, for example, are the best in the bunch and have a fixed rate of 3% or more. The highest fixed rate for I bonds issued from May 2000 to October 2000 was 3.6%.
Savers holding older I bonds with a fixed rate of 3% or more will see an annual rate of approximately 12.6% or more after the May 1 rate starts.
Savers purchased in future years will have a slightly lower fixed rate of 2% or more on I bonds purchased in late 2001, but not before November 1, 2002. Any inflation adjustment will be added to that fixed rate.
As of November 2002, we are seeing a fixed rate of 1% or more for I bonds purchased before May 1, 2008.
Eye bonds purchased after May 1, 2008 close at very small fixed rates. Small fixed rates vary depending on when you bought the bond. The fixed rate on I bonds will be fixed at 0% for bonds purchased from May 2020.
If inflation cools over the next year or two, the inflation-adjusted rate will be lower, but will still add to that 0% constant rate.
Buy now or buy later if you can
The inflation-focused strategy suggests buying I bonds by April 30 to lock in an exceptionally strong rate over a one-year period.
The 7.12% annual rate for the first six months starts in April and runs for six months from September for bonds purchased before April 30.
The same bonds then estimate an annual rate of 9.6% from October to March.
Following this strategy, the average rate will end at 8.36% in 12 months, Pederson said.
It is important to know that you can not cash in I bonds until you have kept them for at least 12 months. And if you redeem I bonds within the first 5 years, you will lose the most recent three months of interest.
Even if you have to sell I bonds for more than a year after purchase, you will earn almost 5.96% after the penalty if you buy before the rate change on May 1st. (One Saturday before April 30th, you may want to buy I bonds a few days in advance to make sure you get that April rate.)
Inflation is likely to remain stable in the coming months due to Russia’s war against Ukraine and supply chain disruptions. Inflation will also ease somewhat as the Federal Reserve makes some moves to raise rates and lower Washington gas prices.
What is known now is that we have a good rate until April 30th and we have a good estimate for the next six months.
IBonds make sense for savers who want to get significantly higher rates than those who parked that money on a one-year deposit certificate.
This article first appeared in the Detroit Free Press: How to buy I bonds with tax refund and more as inflation reaches 8.5%