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With a little more than two weeks to go until taxes are due, more of you are asking questions about using your income tax refund to purchase I bonds.
It’s complicated, as it often is when it comes to investing for retirement. The answers to your questions depend on a variety of factors such as whether you’re planning on requesting an automatic extension of time to file your taxes and what you think the consumer-price index for March will be when it’s reported on April 12.
These complexities aside, however, there is little doubt that I bonds themselves can be desirable additions to your portfolio. I bonds are U.S. savings bonds whose interest rates are based on the Consumer Price Index. Unlike regular bonds that are vulnerable to inflation, I bonds are guaranteed to beat inflation. The specific return you earn with an I bond is a function of a fixed rate, set when you purchase and which doesn’t change for the life of the bond, and a variable rate, which is reset every six months based on the consumer-price index.
Read: Why I abandoned my 529 college savings plan and switched to Series I bonds instead
I-bonds are also different than TIPS, which are otherwise comparable. That’s because an I bond’s value doesn’t fluctuate as interest rates rise or fall. This is a valuable feature, as illustrated last year by the big losses suffered by intermediate-term TIPS. The iShares TIPS Bond ETF
TIP,
lost 12.1% in 2022, even more than the 10.7% loss of non-inflation-adjusted Treasurys of comparable maturities (as judged by the Vanguard Intermediate Term Treasury ETF
VGIT,
). Many investors were stunned by TIPS’ double-digit loss at a time when inflation was running at 6.5%.
For these and other reasons, Zvi Bodie, who for 43 years was a finance professor at Boston University and who has devoted much of his career to researching issues in retirement finance, believes that I bonds are the best investment for your retirement portfolio. He urges all of us to buy as many of them as possible, which is as much as $10,000 per person per year, or $20,000 for a married couple.
What I bonds have to do with tax filing season
Tax filing season provides an exception to this annual limit, however. You are allowed to allocate up to $5,000 of your income tax refund to purchasing I bonds—regardless of whether you have already bought the maximum amount of I bonds you’d otherwise be allowed to purchase.
You can’t take advantage of this exception, however, if you’ve already filed your taxes and didn’t indicate that this is how you want your refund to be directed. In addition, needless to say, you can’t take advantage of this exception if you aren’t due a refund. If that is the case, make a mental note later this year to sufficiently inflate your estimated tax payments for 2023 so that you will be due a refund of at least $5,000 when you file your taxes a year from now.
But if you haven’t filed your taxes this year and you’re due a sizable refund, then you can direct that your refund be used to purchase an I bond by filing IRS Form 8888 along with your tax return.
Should you request an extension of time to file?
Some of you are also asking whether it would be a good idea to delay filing your taxes until after May 1. That date is one of the two times each year when the Treasury Department resets both the I bond fixed rate and its variable rate. Since that fixed rate remains constant for the entire life of the bond—up to 30 years—even a small increase in that fixed rate can make a difference.
The fixed rate currently is 0.4%, and it’s anyone’s guess what the Treasury will set it on May 1. Many think it will be significantly higher, however, and if they’re right it would pay to wait until after May 1 to file and request that your refund be used to purchase an I-Bond. David Enna, the author of the TIPSWatch website, in early March predicted that the fixed rate on May 1 will be set somewhere between 0.6% and 1.0%, which would make it worthwhile to wait. (In light of interest rate volatility in the wake of the Silicon Valley Bank collapse, Enna subsequently said he has become less confident in his prediction.)
Note that the variable rate is likely to be lower after May 1. It currently is 6.48%, and Enna predicts that it could be as low as 3.5% after May 1—3 percentage points lower, in other words. We won’t know for sure until the March CPI level is announced on April 12. Though the reduction in this variable rate would be much greater than the likely increase in the fixed rate, keep in mind that the variable rate is in place for just six months. Over the 30-year life of the bond, even a modest increase in the fixed rate will more than compensate you for a temporary reduction in the variable rate.
There are myriad other considerations that you should take into account when deciding whether to buy I bonds, such as your overall portfolio’s asset allocation, your age, and so forth. As always when it comes to your retirement finances, it is wise to consult a qualified financial planner. But it’s hard to argue with a bond that is guaranteed by the Federal government to not only never lose money but also to beat inflation.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
