Getting a Tax Refund This Year? You May Want to Use It for This Investment

It pays generously without subjecting you to a lot of risk.

At this point, many people are deep in the throes of filing their taxes. And if you're about to submit your return, you may be excited about the refund that's coming your way.

Now, a lot of people rely on tax refunds to do things like pay off their credit cards or cover upcoming expenses. But maybe you're in a different situation, and you don't need that money to dig out of debt or pay for upcoming bills. 

If that's the case, investing your money is a great way to grow it into a larger sum. And there's one specific investment you may want to consider right now.

Take advantage of inflation

Inflation has been surging for well over a year now, and it's definitely put a strain on a lot of consumers. That's the bad news. The good news, though, is that during periods of rampant inflation, I bonds become more attractive.

I bonds are government bonds whose interest rate is pegged to inflation. During periods of high inflation, I bonds pay more. And right now, I bonds are paying 6.89% through April, which is a pretty nice rate of return for an investment that's virtually risk-free, since it's backed by the U.S. government.

How to use your tax refund to buy I bonds

You can purchase I bonds by creating a Treasury Direct account and linking it to a checking account. But if you're getting a tax refund, you don't even have to take that step. Instead, what you can do is fill out IRS Form 8888, which authorizes the IRS to use some or all of your refund to purchase paper I bonds. 

Paper I bonds can be purchased in $50 increments, and you can purchase up to $5,000 using a tax refund. Once the IRS finishes processing your tax return, your I bonds will be sent to you. And you should generally expect to receive them within three weeks of being issued. 

So, let's say you're getting a $3,000 refund this year, and you decide you want to invest half of it in I bonds. You'd simply indicate that on Form 8888, and then the IRS would deposit the remainder of your refund into your bank account (or send you a check if you don't sign up for direct deposit).

A good investment right now

I bonds don't always make sense to buy, because during periods of low inflation, the rate of return on I bonds is much lower. But right now, thanks to rampant inflation, I bonds are paying quite nicely. So you might manage to generate a return on those bonds that's close to what you might get out of a stock portfolio, only without all the risk. 

Now, one thing you should know is that when you buy I bonds, you're obligated to hold them for at least a year. And there are penalties for cashing them out prior to having held them for five years. 

If you're going to use your tax refund to buy these bonds, make sure you're willing to make that commitment. But otherwise, it pays to take advantage of inflation by snagging a high return on an investment that comes with minimal risk -- especially if you don't need your tax refund for bill-paying purposes.