Treasury department announced that they will discontinue selling paper savings bonds through banks and credit unions effective January 1, 2012.
Savers and investors, myself included, will lose a convenient purchase channel.
But they left open a small backdoor. If you really want paper savings bonds, either because you like them in paper form or because you want to buy beyond the $10,000/person limit, it’s still possible to get them after January 1, 2012.
Buy Paper I-Bonds with Tax Refund
The announcement specifically said “Series I paper savings bonds remain available for purchase using part or all of one’s tax refund.”
Note only paper Series I savings bonds (I-Bonds) can be bought this way. You can’t buy paper EE bonds with your tax refund. It’s not a big deal because EE bonds are not as good as I-Bonds anyway.
How do you buy paper I-Bonds with your tax refund? There are extensive FAQs about this on their website. In a nutshell, you fill out a Form 8888 when you file your tax return. You tell the IRS to use part of your tax refund to buy paper I-Bonds for you, in multiples of $50.
Suppose your tax refund is $2,437. You can tell the IRS to buy $2,400 worth of I-Bonds for you, with the remaining $37 refunded to you in a direct deposit or paper check. The first $250 will be issued in five $50 bonds. The rest will be issued in the fewest number of bonds for the amount: $2,400 – $250 = $2,150, which means you will get two $1,000 bonds, one $100 bond, and another $50 bond (total six $50 bonds including the first $250).
Form 8888 has three lines for buying I-Bonds. Line 4 just says “for yourself (and your spouse, if filing jointly).” I suppose for a joint return it means the primary taxpayer as the owner and the spouse as the co-owner. Line 5 and Line 6 let you name the owner and co-owner or beneficiary for two additional purchases.
For some odd reason a joint return can still only buy $5,000 maximum, not $5,000 for each person, whereas two single persons can buy $5,000 each.
Payment with Extension
What if you don’t have enough tax refund or you will owe on your tax return? After you are done with preparing your tax return, don’t file it just yet. File a Form 4868, which is the request for automatic extension to file. Everyone is allowed to file an extension, even if you end up filing by the regular April 15 deadline.
The purpose to file an extension is not to gain more time. It’s to send in a payment to create enough refund for your paper I-Bonds orders. On Line 7 of Form 4868 “top up” your refund to the amount you want in paper I-Bonds.
Suppose your refund is going to be $2,437 and you want $5,000 in paper I-Bonds, pay $5,000 – $2,437 = $2,563 with Form 4868. You can either send in a check or use bank account direct debit with the Electronic Federal Tax Payment System. If you are going to owe $1,536, pay $5,000 + $1,536 = $6,536 with Form 4868 to create a $5,000 refund.
After your check or bank debit clears, enter the extra amount you paid with Form 4868 on Line 68 of Form 1040. Your refund amount will change to the amount you want in paper I-Bonds. You then add Form 8888 for ordering paper I-Bonds.
Too Much Trouble?
Why go through this much trouble to buy paper I-Bonds? Why not just buy online at TreasuryDirect?
Not everybody wants to use the Internet to buy savings bonds. For parents and grandparents buying savings bonds for their children and grandchildren as gifts, an electronic record isn’t as presentable as a nicely printed paper bond. Because TreasuryDirect doesn’t mail or email any statements, it’s easy to forget that you have an account there. Accessing TreasuryDirect account, while super secure, is quite difficult.
More importantly, for investors who want more than the $10,000/person limit in I-Bonds, this small backdoor is the only way to get in unless you create trusts. Currently five-year TIPS are selling at a negative real yield while I-Bonds have a 0% real rate. 0% beats negative.
If I-Bonds continue to compare well against 5-year TIPS and other short-term fixed income investments, I will use this backdoor every year.
Savings for Taxpayers
Although the discontinuation of selling paper bonds through banks and credit unions will cause some inconvenience for me, I understand the reason for this change from the government’s point of view.
The purpose of the Bureau of Public Debt is to borrow money at the lowest cost on behalf of taxpayers to fund the government. It’s not in the business of selling gift certificates to parents and grandparents or giving investors an above-market return.
Selling savings bonds to retail savers and investors is not an efficient way of borrowing money. Treasury can sell more TIPS at a lower yield in one morning than they sell savings bonds in an entire year. Why pay a higher interest rate and take on a higher distribution cost? It doesn’t make sense to the Treasury. We all want an efficient government, right? If I’m the director of Bureau of Public Debt, I would just eliminate the savings bonds program altogether.
I’m glad they still have the program online and they left a small backdoor for paper as well.
For the gifting market, if there is enough demand, banks and credit unions can fill the void and start selling printed Certificate of Deposit. They can offer designs kids and parents want — animals, flowers, sports, action figures, princess, etc., etc. They can include a QR code on the certificate to make it easy for kids to check the value with an iPod. As long as there is enough demand, that demand will be met.
For investors who just want an above-market return on more money, too bad, the easy days are over. Jump through some small hoops. Your diligence will be rewarded.
Update: It worked! Here’s proof: