Should I Cash in My Savings Bonds?

Working at a bank, I hear this question posed quite often. Savings bonds are mysterious at best. No one is sure what they are worth, what kind of interest they are earning, when they are supposed to cash them, and the list goes on and on. Here is some information to help you understand your savings bond investments and make an informed decision about cashing them in or keeping them.

The savings bond program began in 1941 to help finance our participation in World War II. Thus the name “war bonds.” Government bonds have been around in some form ever since. There have been multiple series issued: A, B, C, D, F, G, J, K and Savings Notes (all of which are no longer earning interest and should be cashed in immediately and reinvested. I always advise my customers to seek advice from their tax professional or investment broker to avoid excess taxes if possible.) In addition to these previously mentioned series, there are E, EE, H, HH, & I series. Most of the E & H bonds have stopped earning interest.

Any E bonds purchased between May 1941 through June 1977 will not earn any more interest.

Any H bonds purchased between June 1952 through June 1977 will not earn any more interest.

Any HH bonds purchased between Jan 1980 through June 1987 will not earn any more interest.

All bonds, excluding the H and HH bonds, accrue interest. You do not pay taxes on the interest earned until the bond is cashed. With H and HH bonds, the U. S. government sends you an interest check and you are required to report that interest yearly. HH bonds pay interest for twenty years; the older H bonds, thirty. Until a few years ago, an individual could “roll” his E or EE bond principle and interest into an HH bond and postpone the tax consequences. This option is no longer available.

Bonds are eligible to cash one year from the purchase date. However, most people don’t realize that if you cash them prior to five years from the purchase date, you forfeit 3 month’s interest. Also, the interest you receive is figured on a monthly basis and is the same on the first day of the month as it is on the last. So, if you decide to cash your bonds, do it at the beginning of the month to get the most use of your money.

It’s hard to keep track of the interest rate on savings bonds since it changes every six months. In addition, EE bonds purchased before May 1, 2005 earn a variable rate. EE bonds purchased after April 30, 2005 earn a fixed rate. The current fixed rate through October 2007 is 3.40%; older bonds had a minimum interest rate of 4%. So, if the market was less than that part of the time, the bond earned the greater of the market rate average or 4% minimum.

You will find an enormous amount of information at

The government is encouraging consumers to convert paper bonds to electronic bonds. This allows the consumer to view and manage his or her account online. In addition, when the maturity date arrives, you will automatically receive the funds if you choose the electronic option. This would eliminate the chance of forgetting about them. In addition, you don’t have to worry about losing your paper bonds. Paper bonds can be replaced, but the process is lengthy and complicated.

Another concern is “Can I take an Education Credit with my bond interest?” Again, you need to consult your tax professional. According to the savings bond website “Other restrictions and income limits apply. See more details on the education www.ussavingsbonds.gov including this calculator (http://www.ussavingsbonds.gov/BC/SBCPrice ). It gives the value of your bond, the current interest rate for that bond, and informs you if the bond has matured. You have the option to print or save your bond information. (Note – it is not necessary to enter the serial number of each bond to determine the value; however, doing so gives you a record of bonds you have in case of a fire, etc.)tax exclusion or IRS Form 8815” However, it is important to note that bonds purchased for the purpose of Education cannot be in the student’s name. Bonds must be issued in the name of the tax payer who is 24 years old or older at time of issuance.”

So, ultimately, the decision depends on you. What are you going to do with the money? Do you need it for college or another important purchase? If you have to take out a loan, then perhaps cashing them in would be a better option. Are you going to invest it in something that will earn you a higher rate of return? Or, are you going to put it in your 1% savings account? Will the interest you’ve earned throw you into a higher tax bracket? If so, you may want to cash out a few each year. Do a little research and then make an informed decision.

Reference:

• www.ussavingsbonds.gov