Here’s something cool I learned at Mapgirl’s Fiscal Challenge. Apparently you can now use your tax refund to automatically buy I-series bonds from the U.S. government.

As recently as three years ago, I was a huge fan of tax refunds. Despite the arguments against them, I liked getting a tax refund because it was the only way I’d found to save. I’m able to save on my own now, so I no longer aim to get a tax refund every year, but I certainly don’t fault anyone else for doing so. If that’s what you need to save, then do it!

If you’re truly trying to save with the money, the U.S. government has a new option for you starting this year: Now you can buy U.S. Series I savings bonds with your tax refund. Instead of getting a cash refund, you can designate up to $5,000 of your refund to be delivered in actual paper bonds issued in your name.

I Bonds are savings bonds that are indexed for inflation. The earnings rate on an I Bond has two components:

  • The first is a fixed rate that remains the same for the life of the bond. (It’s currently 0.30%.)
  • The second is the variable “semi-annual inflation” rate. Twice each year (on May 1st and November 1st), this rate adjusts based on the current inflation rate. At the moment, it’s 1.52%.

The fixed rate and the variable rate are combined to get a composite rate, which is currently 3.36%. I know this is a lot of gibberish. All you really need to know is that I Bonds are a safe place to put your money so you don’t have to worry about it losing value to inflation.

Because of this, I Bonds are an attractive alternative to high-yield savings accounts, especially now. They offer higher rates of return, and I Bonds are state and local income-tax exempt. (Federal income tax on I Bonds can be deferred until the bonds are cashed in or stop earning interest after 30 years.)

One drawback? I Bonds aren’t as liquid as a savings account. You can cash them out whenever you want, but if you do so before five years, the bond is subject to a 3-month earnings penalty. (This is sort of like breaking a certificate of deposit early.)

If you’re going to use your tax refund to save, why not actually save, all while getting a great rate of return on your money?

[Thanks to mapgirl for clueing me into this great program! Go check out her blog...]