Here’s how to fight rising inflation with your tax refund

Items for sale at a supermarket in Washington, DC on January 12, 2022.

Stefani Reynolds | AFP | Getty Images

If you’re concerned about skyrocketing costs, you might consider using your tax refund to circumvent purchase limits on I bonds, an almost risk-free, inflation-protected asset.

Annual inflation rose 7.5% in January, rising at the fastest pace since February 1982, according to the US Department of Labor, affecting everyday expenses like energy, food, housing and more.

Some investors have turned to I bonds, paying an annual rate of 7.12% until April, to preserve their purchasing power, according to financial experts.

“The rate is mind-blowing for a government-backed asset,” said certified financial planner Leslie Beck, owner of Compass Wealth Management in Rutherford, New Jersey.

Learn more about personal finance:
This risk-free bond pays an annual interest of 7.12%
Inflation drives up income tax brackets for 2022
Here’s How Rising Inflation May Affect Your 2021 Tax Bill

Although Treasury Inflation-Protected Securities, or TIPS, also adjust for inflation, values ​​fall as interest rates rise, Beck said, while I bonds protect your capital.

While there’s usually an individual purchase limit of $10,000 per calendar year, there are ways to get more, like using up to $5,000 of your tax refund to buy paper I bonds. .

You can request to receive all or part of your refund in the form of Paper I Bonds by completing Part 2 of Form 8888 with your return. But your deposit must be error-free to receive the assets.

“What I really like about this program is that it allows people to use their tax refund to build wealth,” said Eric Walters, CFP, managing partner and co-founder of Summit Hill Wealth. Management in Greenwood Village, Colorado.

Many taxpayers view refunds as “free money” and embezzlement can be a unique way to buy more than the usual I bond purchase limits, he said.

It’s also a chance to save a little more for college since earnings are not taxable if used for qualifying education expenses.

Disadvantages of Bonds I

While it’s easy to see the appeal of I bonds, there are some key downsides to consider before piling on one, experts say.

Yields on I bonds have two legs: a fixed rate and a floating rate, adjusted every six months by the consumer price index. This means that you can get a rate of 7.12% until April 2022, but it can change in May, depending on inflation. This graph shows the history of the two rates.

“These things are floating rate notes with a base rate of zero,” Beck said. “So you could be stuck with a 0% return for a long time if inflation goes back to what it was for the last 10 years.”

Another downside is that you can’t redeem I bonds for at least a year, making them unsuitable for an emergency fund you need for short-term expenses. And you’ll pay the last three months of interest if you redeem I bonds within five years.

In addition, owning paper I bonds has drawbacks, such as the risk of loss, theft or damage. “You tend to put them away and forget you have them,” Beck said.

You can replace missing I-bonds or convert paper bonds to electronic bonds via TreasuryDirect. However, each process has a few steps, which makes it less convenient than the assets of a regular brokerage account.

Comments are closed.