New IRS Checkbox Makes Impulse Savings as Easy as Impulse Spending
The figures are in. The new checkbox that appeared on the IRS tax form for the first time this year allowing taxpayers to use their refund to buy bonds has been a success. As of April 17, 2010, over 18,000 taxpayers had checked that little box and saved an impressive $8 million.
This handy checkbox, announced by President Obama last year, represents an important step in a larger effort to make the annual tax refund season an opportunity for all taxpayers, especially low-income workers, to save. Families with incomes under $49,000 receive an average refund of nearly $1,800 as a result of such tax credits as the Earned Income Tax Credit and the Child Tax Credit. Building this new savings bond option right into the tax form makes impulse savings nearly as easy as impulse spending.
Over 18,000 taxpayers bought bonds through the new tax checkbox saving an impressive $8 million.
For the past three years, the Doorway to Dreams Fund (D2D), a nonprofit based in Roxbury, MA, with support from the Rockefeller Foundation’s Campaign for American Workers, has worked in 26 cities at 50 sites around the country where the IRS offers free tax assistance to families earning under $49,000. They have educated tax preparers on the new opportunity for their clients to purchase these Series I bonds and documented the demand for savings bonds among low-income workers when they are given the chance to purchase them at tax time.
“These bonds are very popular among low-income families,” says Preeti Mehta, Director of Evaluation for Doorways to Dreams Fund. “They’re safe – government-backed, there is a low minimum purchase of only $50, the interest rate is good {3.36% until May 1, adjusting twice a year} and people like the fact that they can’t get their hands on the money for a year,” Mehta adds.
Savings bonds are also a particularly appropriate savings instrument for low-income Americans because they do not require a good credit score or even a bank account and are liquid without being too easy to redeem. Though the bonds can be cashed in without penalty after five years, they can also be redeemed any time after one year, forfeiting only the last there months’ interest. As the bonds grow in value, they provide a cushion of savings that can make low-income families more resilient to short-term risk.
Additional savings opportunities are on the horizon. In 2011, D2D says the tax form will allow taxpayers to purchase bonds in the name of their children. Mehta says this expanded option, which has been quite popular among people savings for their kids’ college, cars, and even weddings, should make purchase of savings bonds even bigger next year.
D2D plans to continue its general awareness-building campaign targeted at networks of tax preparers to encourage them to make their low-income clients aware of this new savings tool. D2D will also conduct further research, test different marketing materials, and continue to build the case for using savings bonds as a savings tool.
“In our research we asked people, ‘What’s the hardest thing about savings?’ They said the biggest obstacle was finding the money to save, and the second was leaving the money alone,” Mehta reports. “Using tax refunds to buy savings bonds solves both of those issues.”
