A Better Use for Your Tax Refund
Steve Rosen

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A few family celebrations are perfect for buying U.S. savings bonds -- the birth of a baby, birthdays, confirmations and high school graduations.

Now, add filing your taxes.

It's part of a push by the Internal Revenue Service this tax-filing season to help put your refund money to work for college education or other long-term savings needs rather than recycling the cash back into your wallet.

If you receive a refund, you can buy Series I savings bonds for yourself or you can share the wealth as a gift for up to two children, grandchildren or other loved ones. A pilot program found that the overwhelming majority of people used their refund to buy savings bonds for their children or grandchildren.

The IRS officially launched the program last year, and the agency said nearly 100,000 savings bonds worth about $11 million were purchased.

Uncle Sam has more to promote this year. The IRS added the gift purchase option in time for the start of the tax season, and it changed provisions for designating co-owners and beneficiaries.

The Series I bonds must be purchased in $50 increments up to $5,000, and will be delivered by mail in paper form either to you or the person you designate. Interest accrues every six months at an inflation-adjusted rate. The interest is exempt from state and local -- but not federal -- income tax.

Bonds bought between now and April's filing deadline will earn 0.74 percent.

The starting point is IRS Form 8888. This Allocation of Refund form must be included when you file your federal income tax return. If you are scheduled to receive a refund, follow the instructions on Form 8888 to instruct the IRS that you are using part or all of your refund to buy savings bonds. The money can also be channeled into your bank account, mutual fund or retirement account.

You can designate anyone to receive a bond and also designate the co-owner or beneficiary.

Generally, the bonds must be held at least one year. But after that, the bond owner can redeem them, though there is a penalty of three months' interest if the bonds are held less than five years. After five years, no penalties apply for early withdrawals.

The puny returns on Series I bonds are competitive with certificates of deposit and some money market accounts, but that's about it. Still, I'm for anything that encourages you to sock away a few bucks for the future.

BOND INFORMATION:

To check the status of a savings bond purchase request, go to the refund section of the IRS website, www.irs.gov, or call 1-800-829-1954.

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