You Can Use Your Tax Refund to Buy I Bonds, but Should You?

You can buy extra low-risk federal inflation bonds using your tax refund. But is it wise to do so this year?

That depends on your goals, financial advisers say. Inflation has cooled somewhat, so rates on I bonds are lagging the impressive levels of last year. If you’re simply looking to maximize the return on your cash for a year, other alternatives — high-yield savings accounts, certificates of deposit or even Treasury bills — may be more attractive.

“You ought to find the best rates you can,” said Jeremy Keil, a certified financial planner in New Berlin, Wis.

But if you’re seeking a safe investment with inflation protection over years or even decades, it may still make sense to buy some I bonds with your refund. “I think I bonds are still worth purchasing,” Ken Tumin, founder of, part of LendingTree, said in an email.

Once obscure, government I bonds have enjoyed renewed popularity over the past two years as inflation has surged. The low-risk bonds pay a rate composed of two parts: a fixed rate for the 30-year life of the bond, once issued, and a rate that can change with inflation (as measured by the Consumer Price Index) every six months, on May 1 and Nov. 1. The Treasury Department applies a formula that melds the two into a combined rate.

For a time last year, the bonds paid an annualized 9.62 percent, leading to a surge in purchases. Bonds purchased through the end of April will earn an annualized 6.89 percent, or about 3.45 percent for the first six months of ownership.

You can’t sell I bonds until you’ve owned them for at least 12 months, however. And it’s uncertain what rate you’ll earn after the first six months since the bonds’ inflation rate may change on May 1. (The Treasury Department announces the rate on the first business day in May, but finance experts often make estimates based on monthly inflation data reported in mid-April.)

Buying before May 1, however, would at least lock in the current 0.4 percent fixed-rate component for those bonds. The fixed rate had been zero for more than two years, before rising in November. (The rationale for the fixed rate is murky because the Treasury Department’s decision-making is “secret,” Mr. Tumin said.)

Mr. Tumin, however, estimates that the overall 12-month return for an I bond purchased before May will be at least 4 percent — not bad, especially since there are also tax benefits. Federal income tax on the interest can be deferred until you redeem the bonds. Interest on I bonds is exempt from state and local income taxes and, if you qualify, from federal income tax when used to pay for higher education.

You can buy up to $10,000 in electronic I bonds per person in a calendar year, with an online account at Plus, you can buy up to $5,000 more in paper bonds per tax return, using your federal income tax refund. (A couple filing a joint return can buy up to $25,000 per year.) You can’t redeem the bonds for at least a year, and if you sell before five years, you’ll forfeit the last three months of interest.

People seeking higher yields in the short term can do better, Mr. Keil said. Twelve-month C.D.s, for example, are available with rates of 4.5 percent or higher. Also, he said, some U.S. Treasury bills, short-term debt issued by the government, are paying around 5 percent, and there are no limits on the amount you can buy.

“If you’re a shorter-term investor,” he said, “ you may be better off with Treasury bills.”

You can buy bills via TreasuryDirect or through a brokerage, although a brokerage will probably charge a commission or fee.

Here are some questions and answers about tax-time I bonds:

How do I purchase I bonds with my tax refund?

File the Internal Revenue Service’s Form 8888 with your tax return to buy paper I bonds. (Some people like to give paper bonds as gifts, and the only way to get them is via a tax refund.) The bonds will be mailed to you when the I.R.S. processes your return. According to TreasuryDirect, the issue date on your bonds — which determines their interest rate — will be the first day of the month in which Treasury’s service center receives payment from the I.R.S. So if the center receives your order anytime in April, the issue date will be April 1 — in time to receive the current annualized rate of 6.89 percent.

The tax filing deadline is April 18, but Mr. Keil advised submitting your return by April 1 if you want to buy I bonds, to make sure that you get the current rate. The I.R.S., which has struggled since the depths of the pandemic with slow processing of paper tax returns, says most returns filed electronically will receive refunds in less than three weeks.

Can I buy digital I bonds using my income tax refund?

Yes — unless you have already bought the annual maximum of $10,000 in electronic bonds this year.

According to the instructions on Form 8888, if you have a TreasuryDirect account, you can complete Part 1 of the form and have your refund deposited directly into your account so you can buy the bonds. The form asks buyers to identify the type of account used. If using TreasuryDirect, check the box for “savings,” the instructions say.

Is the minimum holding period for savings bonds ever waived?

The government often waives the 12-month holding period in the event of natural disasters, like the severe storms and tornadoes that struck Alabama in January.

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