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IRS program allows taxpayers to put refunds in bonds

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By Susan Tompor
Monday, April 11, 2011
 

How do you want your refund• Paper check• Direct deposit into checking?

Deposit some refund money into an Individual Retirement Account• Or buy a U.S. savings bond for your son or daughter?

What• Buy a bond for a loved one via a tax return• You might not have this option if it weren't for a nonprofit called the Doorway to Dreams Fund and others who want Americans to build their savings.

The idea is to encourage lower-income people -- and frankly, everyone else -- to direct some part of their tax refund to longer-term savings.

"You can put it in your name -- and up to two other people," said Marshall J. Hunt, director of the tax assistance program for the Accounting Aid Society of Detroit.

If you wanted, you could put part of your federal income tax refund into a bond, part into a bank account and, if you needed to do so, still receive a paper check for the balance.

The Doorway to Dreams Fund, based in Roxbury, Mass., with support from the Rockefeller Foundation's Campaign for American Workers, tested strategies in the past few years by tapping into tax sites run by the Volunteer Income Tax Assistance Program, including the metro Detroit Accounting Aid Society.

Other organizations that participated in the pilot included: Louisville Asset Building Coalition in Kentucky, Rochester CASH in New York, Burlington CASH in Vermont, and Hispanic Unity of Florida in Hollywood, Fla.

Frankly, it's not a bad idea at all. Everyone knows that many people get giddy with any windfall -- and go out and book a cruise or remodel that kitchen. Or they park money in a checking account -- only to gradually spend it on, well, who knows what?

LaSha' Bonner-Fincher, who graduated from Temple University in January, said she took $500 of her tax refund this year, filled in the correct lines on Form 8888 and bought two $250 Series I savings bonds -- one for herself and one for her 3-year-old daughter, Lexi.

She liked the idea of directly using tax refund money -- without that money ever hitting her bank account. "The money is there, and it's like I won't miss it," she said.

Plus, she was touched at her college graduation to learn that her now-deceased mother had bought her savings bonds when she was young.

Tax filers can save as little as $50 with a Series I savings bond -- no fees, no credit check and no risk of losing the initial investment.

"It's really a great way to protect a small saver's initial deposit," said Joanna Smith-Ramani, director of strategy for the Doorways to Dreams (D2D) Fund.

It's also a way to curb impulse spending or set aside money to cover emergencies or a job loss. Supporters were able to convince the U.S. Treasury that it was doable to offer savings bonds via tax forms. Only an administrative change to forms was needed; no legislation was necessary.

Tax filers who want to buy savings bonds need to see Form 8888, which allows taxpayers to split that refund among several options.

The idea fit well into the Obama administration's goals for shoring up savings for the middle class.

"This isn't just one group's crazy idea on how you get people to save," Smith-Ramani said.

Granted, no one is expecting that huge amounts of money will be saved this way.

Series I savings bonds earn interest based on inflation. But the rates are miserable right now. The annualized rate is 0.74 percent, and new rates will be posted May 1. Rates adjust every six months after you buy the bond.

You would not be stuck receiving 0.74 percent forever; the rate could go up later with inflation. The bonds can grow in value for up to 30 years.

While the rate is low, it's better than most regular savings accounts.

You don't have to use that refund to buy an I Bond. Some savers might prefer to use Form 8888 to directly deposit their federal income tax refunds into an IRA, Health Savings Account, Archer Medical Savings Account, Coverdell education savings account or a TreasuryDirect online account.

Will it work• It's really hard to judge.

But the D2D Fund is optimistic based on its research.

From 2007 through 2009, about 3,025 clients of the volunteer sites bought U.S. savings bonds as part of this program. Of the volunteer tax program's clients in the pilot, roughly 31,200 tax filers were eligible to buy bonds. The amounts set aside in bonds during those years ranged from $185 to $222.

Last year, individuals could buy savings bonds for themselves -- not others -- nationwide via tax returns.

The Internal Revenue Service reported that during 2010, more than 99,000 savings bonds were purchased on Form 8888, totaling more than $11 million.

Smith-Ramani expects more bonds to be bought now that savers nationwide can use that money for family members or anyone else -- instead of just themselves.

A D2D study shows that some parents find it easier to think about saving for someone they love than saving money for themselves. "They care about the children in their life," Smith-Ramani said.

And this year, if someone does not have a bank account, they still can buy a savings bond. They can buy a bond -- and receive the remaining refund via a paper check.

Is this one of those sizzling ideas that everyone will be bugging their tax preparers about• No way. But it sounds like a good idea for a lot of people -- if they would use it.

Additional Information:

A closer look

Want to buy a savings bond with your tax refund?

It is possible to buy Series I U.S. Savings Bonds with a portion or all of your federal tax refund for you -- and for someone else, too.

• When filing your taxes, see Form 8888, Allocation of Refund (Including Savings Bond Purchases.)

• You would have to set aside at least $50 for each of these bonds you could be buying via a tax form.

• You may purchase up to $5,000 in U.S. Series I Savings Bonds for yourself or anyone else via your tax refund. Bonds must be purchased in multiples of $50. The rest of your money could be deposited into another account -- or mailed by paper check.

• If you get a bond with your tax refund, paper bonds will be issued in your name or the name you designate as primary owner, co-owner or beneficiary. If you are married and filed a joint return, the bonds will be issued in your name and your spouse's name. You can also designate a beneficiary or co-owner under this name registration option.

• The U.S. savings bonds would be sent in the mail.

• Remember, you cannot cash in a new savings bond within 12 months after it is issued. Also, you would forfeit the three most recent months of interest if you cashed that savings bond within five years. There is no penalty if you cash the bond after five years.

• You cannot have your refund deposited into more than one account or buy paper bonds with Form 8379, Injured Spouse Allocation.

• See www.treasurydirect.gov for details on the bond program.

 

 
 


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