Obama accepts Tufano proposal for turning tax refunds into Savings Bonds
Sunday, September 6th, 2009
Categorized as: Savings Bond news
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This was originally suggested by Harvard Business School’s Professor Peter Tufano and has been tested by the IRS and the tax-return preparation company H&R Block.
There’s no word yet on whether both Series I and Series EE bonds will be eligible, or on whether the annual Savings Bonds investment limit will be raised from its current miserly level. [Later: see the comments below for more info.]
From the fact sheet:
Create Easier Ways to Save Tax Refunds: More than 100 million families receive federal income tax refunds each year. Averaging more than $2,000, tax refunds present a unique opportunity for families to save. Taxpayers can already instruct the IRS to directly deposit their refunds and dedicate a portion to an IRA or other savings vehicle. Today, the Treasury and IRS announced that taxpayers will have another savings option beginning in early 2010 — the ability to use their refunds to purchase U.S. savings bonds simply by checking a box on their tax return, without having to open an account at Treasury or take any other action, and even if the taxpayer doesn’t have a bank account. The savings bonds would be mailed to the taxpayer. Taxpayers will be able to purchase bonds in their own names beginning in 2010 and to add co-owners such as children or grandchildren beginning in 2011.
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Tom Adams
See #4 and #5 in this new IRS Q-and-A:
http://www.irs.gov/pub/irs-tege/ibond_questions_answers.pdf
Chris - thanks for the link to the IRS document.
Among other things, it indicates that only paper Series I bonds are available through this program, not Series EE (this is good) or TreasuryDirect’s electronic bonds (this is a surprise).
It indicates that the $5,000 annual purchase limit is still in effect and that investments using your tax refund count against the annual limit for paper I bonds. (There’s a separate $5,000 limit for I bonds from TreasuryDirect.)
It also suggests that the Treasury uses a formula involving 10-year TIPS to determine the I bond fixed rate:
I’ll have to check that out some more.
Tom Adams
Isn’t that what you’ve been saying all along Tom?
Ethan - I haven’t been using a “market average of yields” for 10-year TIPS, just the rate the day before the announcement. Clearly the-rate-the-day-before is what they used for the announcements from Nov 05 to Nov 07 (see the table here), but it’s not what they’ve been using since.
Tom Adams
The new tax refund in savings bonds program has the potential to attract new savings bonds investors. If the goal is the attract less savvy investors, I understand why the bonds will be in paper form (even though the cost of issuance will be higher and it’s against the current Treasury goals of moving to an electronic platform). I wonder if this move will cause Treasury to set the fixed rate higher in November since they would want the first IRS savings option to be a “success” and many refunds would be issued during this time period.
Tom:
You’ve made the point that the Treasury Dept has been de-emphasizing the Savings Bond program - they eliminated publicity and advertisements, they drastically reduced the purchase limits, and they set the Series-I base-rate much below the corresponding base-rate for TIPS. In light of the President’s proposal, do you think the Treasury will change direction and reinvigorate the Savings Bond program ?
Chris and Steven - I hope you’re both right!
Tom Adams
Well, if they keep offering that grand 0% return, I don’t think they will have much success. Why not just buy gold?
BTW…why are they so intent on selling public debt to the Chinese and yet so against selling it to their own citizens? It does not make much sense to me. Shouldn’t US citizens get first and best choice on buying debt instruments from the government?
I don’t understand this.
This sounds all well and good but those that typically recieve a refund typically rely on it for living expenses. Most consumers or tax payers in this case are investor savvy people and will not trust the governement to keep their money in the form of a bond and have no access to it.
I don’t know if this is a good thing or not. It will definitely be a good thing for the Obama Administration as it would keep more federal income tax withholding funds in the government’s hands instead of refunding them to taxpayers.
On the downside, it will eventually cost taxpayers more as the accrued interest will have to be paid from tax revenue. However, the government will get some of that back in income taxes when the bonds are redeemed.
Then again, if it helps people think about saving for the future, maybe even fund their IRA, that would be a good thing on the whole.
Do you think paper-based savings bonds will remain for a little longer now?
I like to purchase paper bonds. Was hoping they’d never get rid of that option.
I agree with George above. I have felt the same way for a long time. Wouldn’t it be better for the USA if the debt were shouldered more by American citizens than by foreign powers?
Given the fiscal mess this country is in at the present time, I believe individuals will have to increasingly bear the burden for financing their own retirement. The “Joe Sixpacks” of the nation need hocus-pocus free way of saving for retirement that has low risk, tax advantages, and can be purchased in small denominations.
Since the government has found ways to throw money at large corporations that did poorly through poor management decisions, why can’t the government do something for the average citizen? I say they should drop the limits on savings bond purchases, offer enticing interest rates on savings bonds, and re-implement income producing bonds (ala series HH bonds) for folks already in retirement. Also, re-implement $10,000 series I bonds, perhaps using Marilyn Monroe’s picture on them. If a good interest rate doesn’t sell them, perhaps Marilyn will!
I’m glad the tax refund bonds will be in paper form. I’ll be happy if paper bonds never go away.
Craig and Jon: Paper U.S. Savings Bonds do have one apparent advantage over electronic U.S. Savings Bonds. In the event of an adverse money judgment, the court must obtain physical possession of the paper bonds in order to redeem them as per the settlement. With that being said and I believe as Tom Adams hinted to some time ago, those who refuse to hand over the bonds in this case would presumably be subject to all the powers of the court.
Amen to that, Jon. Drop the purchase limits and roll out a Marilyn Monroe 10K I bond. I’ll be first in line!
After all this crisis, I’d think the Treasury could really sell a lot of bonds with some simple marketing. No better time to market a rock solid investment.
As for the paper bond — I read some study results by the savings bond working group (not sure if I have that name right). It was mentioned that a possible alternative to paper bonds was a savings bond debit card of sorts.
That’s one sure way to cheapen the savings bond for good…I’ll not have my savings bonds in plastic form, thanks…plastic reminds me of cheap crap coming out of China… 🙂
Call me old fashioned, but one nice feature of buying savings bonds is getting the paper bond. Stocks and other corp bonds are boring. Could care less about the paper. It’s just an electronic holding to me. But US savings bonds just have a nice feel to them in paper form. Drives home the no-nonsense, rock solid feel of the investment.
Invokes a good sense of patriotism too. Holding a nice paper bond and storing it right next the the nice patriotic stash of silver… 🙂
Craig said: “But US savings bonds just have a nice feel to them in paper form. Drives home the no-nonsense, rock solid feel of the investment.”
I agree totally. I recall getting savings bonds from my grandparents as gifts in the 1950’s. My grandparents mentioned the solid safety of bonds. I never forgot that and it has influenced my “saver mentality” since. Can a grandparent pass the same message to a grandchild by pointing to a serial number of an electronic bond on a computer monitor screen? I’m doubtful.
Tom,
The United States federal debt equates to $600,000 of debt for each and every American family. This is an “interest only” debt (we are not currently paying back any principle). Short term T-Bill rates are only around 0.02%…so the annual cost to service this debt is just a few thousand dollors per household. But interest rates will eventually rise to historically normal levels between 5% and 10%. At that point the cost per US house will be between $30,000 and $60,000 per year….that is just to cover the cost of interest (not principle)…..it does not include state and local government debt…it does not include the growing cost of entitlements….and it does not include personal household debt.
How much of our federal debt do you think this “tax refund to bonds” program will cover?
Patty
Patty - the US public debt this year will be on the order of $13,000 billion.
The total amount of Savings Bonds currently outstanding is about $200 billion, which is about 1.5% of the total.
I don’t expect this program to significantly increase the current levels of Savings Bond investment, so I’d guess it will cover less than 0.1% of the public debt. In other words, I’d be surprised if the program had an impact on even the rounding error.
The purpose of the program is to give people who don’t have access to traditional savings programs a way to save. It was never meant as a way to cover any significant amount of the public debt.
Tom Adams
My company recently discontinued a savings bond purchase program trhough payroll. Too few people were using it to make it worth the effort. That’s too bad because squirreling away a few dollars each month in a low-risk investment tool would really benefit a lot of people in the long run.