By Sheryl Rowling
SAN DIEGO — Dear Money Maven, My wife and I own quite a few savings bonds. I can’t even remember when we bought them. Should we keep these bonds or cash them in?
With Interest,
Irv
Dear Irv,
I can’t give you a definite answer without knowing more about your bonds. However, I can tell you what you need to know!
Be sure to follow three simple rules:
- Check the maturity dates of your bonds to be sure they’re still earning interest.
- Beware of tax on the interest whenever you redeem your bonds.
- Be sure not to redeem your bonds just prior to an interest-posting date.
Many investors, especially retirees, have accumulated numerous United States savings bonds over the years. In a typical situation, savings
bonds have been accumulated through gifts and periodic purchases. The bonds are then set aside in a drawer, safe deposit box or shoe box—and forgotten about.
Series E and EE bonds accrue interest, which, in turn, increases redemption value. Thus, although savings bonds will increase in value, no current income will be produced. If a retiree is in need of additional cash flow, he or she may be tempted to redeem savings bonds.
A savings bond that is redeemed for cash value will usually cause the tax recognition of all accrued interest income. The tax laws allow
the holder of a savings bond to elect to report accrued interest as taxable income each year. Since this election accelerates tax and binds the taxpayer
forever, most taxpayers will choose not to elect current taxation of savings bond interest. Thus, a retiree cashing in a bond in order to free up cash may face an unexpectedly high tax liability.
EXAMPLE
Henry purchased ten $1,000 Series EE bonds for $500 each many years ago. Henry retires at age 62 and decides to redeem his bonds, now worth
$17,000. Since he did not elect current taxation of savings bond interest, Henry will recognize all accrued interest as taxable income in the year of
redemption. Thus, Henry will recognize interest income of $12,000 ($17,000 redemption proceeds less $5,000 originally paid). Since U.S. savings
bond interest is not taxable for state tax purposes, Henry will pay Federal tax only. Assuming a Federal tax rate of 28 percent, Henry will incur a tax
liability on the savings bond interest of $3,360.
If savings bonds are forgotten for too long a period of time, detrimental financial results may occur. Series E and Series EE bonds cease to
earn interest at ‘‘maturity.’’ For example, Series EE bonds mature after 30 years. A forgotten bond that has ceased to earn interest will actually lose
value, when inflation is considered. Thus, it is important to monitor the status of Series E and EE bonds held to ensure that they are still accruing
interest.
Prior to September 1, 2004, Series E and Series EE bonds could be exchanged for an equivalent amount of Series HH bonds without recognition of
income. However, after August 31, 2004, the Treasury ceased to issue Series HH bonds.
In general, savings bond interest is credited only two times per year. Thus, a bond holder who is considering redeeming a bond should pay
attention to the timing of interest postings. A bond that is redeemed shortly before the posting of interest will essentially forfeit almost six months of
interest earnings.
*
Sheryl L. Rowling, CPA/PFS, partner of Moss Adams Wealth Advisors LLC, has been providing tax, financial planning and investment advice for over 30 years, since 1979. She may be contacted at sheryl.rowling@sdjewishworld.com