Financial Face-Off: Should You Use Your Tax Refund to Buy I-Bonds or Crypto? One of these options could yield a 9.6% return. Let’s explain.

Hello and welcome to Financial Face-off, a MarketWatch column where we help you weigh financial decisions. Our columnist will give her verdict. Tell us in the comments if she’s right. And please let us know your suggestions for future Financial Face-off columns.

The clash

If you get a tax refund this tax season, there are ways to use it that you may not be aware of – one is new this year, one has been around since 2010.

If you are a TurboTax INTU,
-1.13%
Customer you can now convert your tax refund into cryptocurrency thanks to a new partnership with Coinbase COIN,
-4.85%.
And through the IRS, any taxpayer can use all or part of their refund to purchase US Series I savings bonds. Which makes more financial sense: use your tax refund to buy crypto or use your refund to buy I-Bonds?

Why it matters

Cryptocurrency is a hot topic. Likewise inflation. You may be suffering from FOMO because everyone and their mom seems to be investing in crypto. Inflation can give you another type of FOMO: fear that your money will be overwhelmed by rising prices.

While people can turn their heads when celebrities ping digital currencies, fear of missing out isn’t a compelling reason to use your tax refund to buy crypto, said Catherine Valega, certified financial planner and chartered alternative investment analyst at Green Bee Advisory at Winchester, Mass.

“Everyone is way ahead of themselves because it’s that hot advantage that everyone is talking about,” Valega said. “People buy it before they do the other, more boring, financial planning tasks.” Don’t consider buying crypto until you’ve covered the basics like setting up an emergency fund, maximizing your 401(k) contributions, maintaining life insurance, and the setting up a college savings plan if you have kids, she said.

While Valega sees a future where everyone will have some digital assets in their portfolio, it’s early days. There are thousands of cryptocurrencies and the most popular ones are expensive and volatile. bitcoin BTCUSD,
-4.11%
fell nearly 8% in one day earlier this week to trade below $40,000 for the first time since mid-March; ether ETHUSD,
-4.62%
fell 9% to around $2,998 in 24 hours.

I-Bonds are considered a safe haven asset in contrast to crypto, which some call the “silver lining” of our inflation-ridden economy.

In contrast, I-Bonds are considered a very safe haven asset, which some have called the ‘silver lining’ of our inflation-ridden economy. Its return, partially linked to inflation, was 7.1% in mid-April. They should reset to 9.6% on May 1st, based on the latest CPI, according to MarketWatch columnist Mark Hulbert.

But to get that return, you have to hold I-Bonds for at least a year, and there’s a three-month penalty if you cash out before five years.

A few other caveats about I-Bonds: You have to set up and manage the account on the TreasuryDirect.gov website yourself (a financial advisor can’t do that for you), Valega said, and the process can be cumbersome. Consider the time value of money and whether it’s worth keeping track of the account for, Valega said.

A person can buy a maximum of $15,000 per year in I-Bonds — $5,000 through their tax return and $10,000 with other money. That’s a lot of money for many people, but for wealthier households it may not be enough to justify the outlay, said Valega, whose clients typically have at least $250,000 to $2 million in investable assets. “In your overall budget, do you have the time to manage it?” said Walega. You may need to focus your time on more pressing matters, like increasing your income or increasing college savings. But “for anyone who has the time, I’d say it’s a no-brainer,” she said.

The judgment

This financial face-off is a bit of a trick question, as neither option is really the “right” answer. I say that because a big tax refund means you’ve had too much tax taken off your paycheck all year and you’ve given Uncle Sam an interest-free loan. That’s an issue you need to address, financial planners told me, before you decide what to do with the money. (To fix this, you can customize your W-4 form or check with an accountant about your optimal payroll deductions.)

Before you consider investing in a tax refund, make sure the money isn’t better spent paying off credit card debt, putting money into a retirement account, or topping up an emergency fund, said George Gagliardi of Coromandel Wealth Management in Lexington, Mass .

This financial confrontation is a bit of a trick question because neither option is really the “right” answer.

“Investing is appropriate after the fundamental financial issues have been addressed, which means the funds are really excess money,” he told MarketWatch. “The problem with viewing a tax return as a bonanza that can be spent or invested anywhere is not viewing it as money earned, which it was. People receiving tax refunds should consider their refunds much better than just paid wages and treat them accordingly.”

But if you get a sizable refund and are lucky enough not to need it for bills or other more immediate expenses, I say go with I-Bonds.

my reasons

Insecurity abounds in our world. Who can say no to a 9.6% guaranteed yield on I-Bonds? It’s something to look forward to.

Is my judgment best for you?

On the other hand, if your financial house is in order and crammed with cash, you might consider dipping a toe into crypto with your tax refund.

“For investors with greater risk tolerance, risk capacity, and longer time horizons, crypto offers an intriguing if somewhat speculative investment,” said Hank Fox, a CFP and investment advisor representative at Blue Bell Private Wealth Management LLC outside of Philadelphia. “Investors need to be able to accept potentially steep price swings like the ones we’ve seen this year. Also, crypto doesn’t offer the protection that i-Bonds offer, so investors must be willing to accept the loss of some or all of their investment.”

Tell us in the comments which option should win in this financial duel. If you have ideas for future Financial Face-off columns, email me.

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