Financial Face-Off: Should you use your tax refund to buy I bonds or crypto? One of these options could get a 9.6% return. Let us explain.

Why it matters

Cryptocurrency is a hot topic. So is inflation. You may be suffering from FOMO over what seems like everybody and their mother investing in crypto. Inflation may be giving you another kind of FOMO: fear of your money being overwhelmed by soaring prices.

While people can have their heads turned by celebrities shilling digital currencies, fear of missing out is not a compelling reason to use your tax refund to buy crypto, said Catherine Valega, a certified financial planner and chartered alternative investment analyst with Green Bee Advisory in Winchester, Mass.

“Everybody is getting way ahead of themselves because it’s this hot asset that everyone is talking about,” Valega said. “People are buying it before doing the other more boring financial planning 101 tasks.” Don’t consider snapping up crypto until you’ve covered basics like creating an emergency fund, maxing out your 401(k) contributions, taking care of life insurance and establishing a college savings plan if you have kids, she said.

While Valega sees a future in which everyone will have some digital assets in their portfolio, it’s still early days yet. There are thousands of cryptocurrencies and the most popular ones are expensive and volatile. Bitcoin
BTCUSD,
-3.13%
dropped nearly 8% in a day earlier this week to trade below $40,000 for the first time since mid-March; ether
ETHUSD,
-4.38%
plunged 9% in 24 hours to around $2,998.

I bonds, by contrast, are considered an extremely safe investment that some call the “silver lining” to our inflation-racked economy. Their yield, which is partly pegged to inflation, was at 7.1% as of mid-April. They should reset on May 1 to 9.6%, based on the most recent Consumer Price Index, according to MarketWatch columnist Mark Hulbert. 

But to reap that return, you need to hold onto I bonds for at least a year, and there’s a penalty of three months interest if you cash out before five years. 

A few other caveats on I bonds: you have to set up and manage the account on the TreasuryDirect.gov website yourself (a financial adviser can’t do it for you), Valega said, and the process can be clunky. Consider the time value of the money and whether the work of keeping track of the account will be worth it to you, Valega said.

An individual can buy a maximum of $15,000 per year in I bonds — $5,000 through their tax refund and $10,000 with other money. That’s a lot of money to many people, but for more well-off households, it may not be enough to justify the hassle, said Valega, whose clients typically have at least $250,000 to $2 million in investable assets. “In your overall financial plan, do you have the time to manage it?” Valega said. You may need to spend your time on more pressing concerns like increasing your income or growing college savings. But, “for anybody who has the time, I’d say it’s a no-brainer,” she said.

The verdict

This Financial Face-off is a bit of a trick question, because neither option is really the “right” answer. I say that because if you’re getting a big tax refund, it means too much tax has been taken out of your paychecks throughout the year and you’ve been giving Uncle Sam an interest-free loan. That’s an issue you need to address, financial planners told me, before deciding what to do with the money. (To remedy this, you can adjust your W-4 form or check with a tax pro about your optimal paycheck withholdings.)

Before considering investing a tax refund, make sure the money wouldn’t be better spent on paying down credit-card debt, putting it into a retirement account, or bulking up an emergency fund, said George Gagliardi with Coromandel Wealth Management in Lexington, Mass.

“Investing is appropriate after the basic financial issues have been addressed, meaning that the funds are truly excess money,” he told MarketWatch. “The problem with regarding a tax return as a windfall that can be spent or invested anywhere is not viewing it as money that was earned, which it was. People getting tax refunds would be far better considering their refund as just returned wages and treat it accordingly.”

But if you’re receiving a sizable refund and you’re lucky enough to not need it for bills or other more immediate expenses, I say go with I bonds. 

My reasons

Uncertainty abounds in our world. Who can say no to a guaranteed return of 9.6% on I bonds? It’s something to look forward to. 

Is my verdict best for you? 

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

“For investors with greater risk tolerance, risk capacity and longer time horizons, then crypto offers an intriguing, albeit somewhat speculative, investment,” said Hank Fox, a CFP and investment advisor representative at Blue Bell Private Wealth Management LLC outside of Philadelphia. “Investors must be able to accept potentially steep price gyrations, as seen this year. Also, crypto does not provide the protection offered by I bonds, so investors must be willing to accept losing some or all of their investment.”

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

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