Use your tax refund to invest in your future

April 10, 2011 at 12:00a.m.

How do you want your refund? Paper check? Direct deposit into checking?

Deposit some refund money into an Individual Retirement Account? Or buy a U.S. savings bond for your son or daughter?

What? Buy a bond for a loved one via a tax return? You might not have this option if it weren’t for a nonprofit called the Doorway to Dreams Fund and others who want Americans to build their savings.

The idea is to encourage lower-income people — and frankly, everyone else — to direct some part of their tax refund to longer-term savings.

“You can put it in your name — and up to two other people,” said Marshall J. Hunt, director of the tax assistance program for the Accounting Aid Society of Detroit.

If you wanted, you could put part of your federal income tax refund into a bond, part into a bank account and, if you needed to do so, still receive a paper check for the balance.

The Doorway to Dreams Fund, based in Roxbury, Mass., which had support from the Rockefeller Foundation’s Campaign for American Workers, tested strategies in the past few years by tapping into tax sites run by the Volunteer Income Tax Assistance Program, including the metro Detroit Accounting Aid Society.

Other organizations that participated in the pilot included: Louisville Asset Building Coalition in Kentucky, Rochester CASH in New York, Burlington CASH in Vermont, and Hispanic Unity of Florida in Hollywood, Fla.

Frankly, it’s not a bad idea at all. Everyone knows that many people get giddy with any windfall — and go out and book a cruise or remodel that kitchen. Or they park money in a checking account — only to gradually spend it on, well, who knows what?

LaSha’ Bonner-Fincher, who graduated from Temple University in January, said she took $500 of her tax refund this year, filled in the correct lines on Form 8888 and bought two $250 Series I savings bonds — one for herself and one for her 3-year-old daughter, Lexi.

She liked the idea of directly using tax-refund money — without that money ever hitting her bank account. “The money is there, and it’s like I won’t miss it,” she said.

Plus, she was touched at her college graduation to learn that her now-deceased mother had bought her savings bonds when she was young.

Tax filers can save as little as $50 with a Series I savings bond, save without fees, no credit check, and won’t lose the initial investment.

“It’s really a great way to protect a small saver’s initial deposit,” said Joanna Smith-Ramani, director of strategy for the Doorways to Dreams (D2D) Fund.

It’s also a way to curb impulse spending or set aside money to cover emergencies or a job loss. Supporters were able to convince the U.S. Treasury that it was doable to offer savings bonds via tax forms. Only an administrative change to forms was needed; no legislation was necessary.

Tax filers who want to buy savings bonds need to see Form 8888, which allows taxpayers to split that refund among several options.

The idea fit well into the Obama administration’s goals for shoring up savings for the middle class.

“This isn’t just one group’s crazy idea on how you get people to save,” Smith-Ramani said.

Granted, no one is expecting that huge amounts of money will be saved this way.

Series I savings bonds earn interest based on inflation. But the rates are miserable right now. The annualized rate is 0.74 percent, and new rates will be posted May 1. Rates adjust every six months after you buy the bond.

You would not be stuck receiving 0.74 percent forever; the rate could go up later with inflation. The bonds can grow in value for up to 30 years.

While the rate is low, it’s better than most regular savings accounts.

You don’t have to use that refund to buy an I Bond. Some savers might prefer to use Form 8888 to directly deposit their federal income tax refunds into an IRA, Health Savings Account, Archer Medical Savings Account, Coverdell education savings account or a TreasuryDirect online account.

“We’re not here to say it’s savings bonds over everything else,” Smith-Ramani said.

Is this one of those sizzling ideas that everyone will be bugging their tax preparers about? No way. But it sounds like a good idea for a lot of people — if they would use it.

See www.treasurydirect.gov for details on the bond program.

Susan Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at stomporfreepress.com.

2011, Detroit Free Press

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