By David Enna, Tipswatch.com
If you’ve been overpaying estimated taxes all through 2024 with the intention of purchasing paper U.S. Series I Savings Bonds in 2025 … it’s time for a new plan.
Reporter Susan Tompor of the Detroit Free Press last week discovered a little-noticed press release from the U.S. Treasury declaring an end to the tax-refund issuance of I Bonds, beginning on Jan. 1, 2025.
The decision ends the Tax Time Savings Bond program, which was started in 2010 to give tax-filers the ability to buy paper I Bonds in lieu of a federal tax refund. The program was the last way to purchase any kind of paper savings bonds, which otherwise went all-electronic in 2012. Treasury listed several reasons for the change:
- “This option was costly and not frequently used.”
- “The mailing of physical savings bonds was also subject to fraud, theft, loss, and delays.”
- Only 35,000 tax filers each year bought paper I Bonds, representing 0.03% of tax filers, and less than 10% of Series I bond purchasers.
- Sales of paper I Bonds through this program made up less than 1% of all I Bond purchases.
Treasury also noted that taxpayers who received an extension to Oct. 15, 2024, on their 2023 tax filings will still be able to purchase paper I Bonds with a refund using IRS Form 8888. I am assuming very few people will qualify for that last-ditch opportunity.
And finally, it noted that despite the end to the tax-refund program, the $10,000 per person per calendar year purchase will not change.
You may continue to purchase up to $10,000 of series I bonds in a calendar year.
Reaction
I support this decision, but it should have been paired with an increase in the electronic purchase cap to $15,000, at least. Back in February 2022 I suggested that the Treasury raise the cap to $20,000 while also eliminating the paper I Bond tax refund.
When I Bonds were first created in the fall of 1998, the purchase limit was $30,000 per person per year, and the Treasury even allowed credit cards to be used for purchases with no fees. (Air miles!) However, the Treasury determined about 98% of all savings bonds were purchased in amounts under $5,000. This triggered a new policy in 2008: a $5,000 limit per calendar year.
The current limit of $10,000 per person went into effect in January 2012. If that $10,000 limit had been adjusted for inflation since 2012, it would be about $13,700 today.
I never used the paper I Bond strategy because in my opinion it wasn’t worth the hassle. But it was widely used by many people back in 2022 when the I Bond’s variable rate began the year at 7.12% and then rose to 9.62% on May 1, 2022.
As things stand today I doubt many people were planning on triggering the strategy in 2025, when the I Bond’s composite rate could fall to something like 3.4%, down from the current 4.28%.
Paper I Bonds are getting difficult to cash at many banks because of fear of fraud. So that means for ease of ownership, the paper I Bonds should be converted to electronic form, which is another hassle. Read this.
The gift box strategy continues
Instead of using the tax-return strategy, many investors have been using TreasuryDirect’s “gift box” to make additional electronic purchases in a calendar year, to be delivered later to a trusted partner. In its press release, the Treasury reinforced that the gift-box program is continuing:
Can I still gift someone a series I bond?
Yes. You can buy a series I bond as gift electronically in TreasuryDirect. Bonds bought as gifts are registered in the name of the gift recipient, and do not contribute to your $10,000 purchase limit (note: the $10,000 limit still applies to the recipient in the year they are delivered).
I added the bold text in the above quote as a clarification. Full instructions are here.
The gift-box strategy requires a trusted partner, such as a spouse or adult relative. So it won’t work for everyone. Investors can also add to their holdings with electronic purchases through trusts, or business-owner strategies.
I don’t sense a lot of enthusiasm right now for investing in I Bonds and certainly the fervor is well below the mania of two years ago. But, because the I Bond’s fixed rate should hold above 1.0% at the November 1 reset — and 1.2% or 1.3% seems more likely at this point — gift-box purchases will continue to be potentially attractive, both before the November reset and into 2025. A fixed rate above 1.0% is sound, even if the variable rate is rather weak for six months. The fixed rate holds for the full 30-year term of the I Bond.
Today, the I Bond’s fixed rate is 1.3% and the 5-year TIPS has a real yield of 1.70%. That is a 40-basis-point spread, which is reasonable given the I Bond’s advantages of easy ownership, tax-deferred interest and rock-solid deflation protection.
If the 5-year TIPS yield continues to decline, the I Bond will look more and more attractive. But that is a topic for another day.
• Confused by I Bonds? Read my Q&A on I Bonds
• Let’s ‘try’ to clarify how an I Bond’s interest is calculated
• Inflation and I Bonds: Track the variable rate changes
• I Bonds: Here’s a simple way to track current value
• I Bond Manifesto: How this investment can work as an emergency fund
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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
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