piggy_bank_homespun_7_27For some people, the U.S. savings bonds they’ve bought end up forgotten in a drawer, closet or safe-deposit box. But these days, when cash is king, those bonds may yield a nice surprise. Your bond may have matured and stopped earning interest-and that means it’s time to cash it in.

“In these lean times, these savings bonds, which can be worth at least three to four times their face value, can be a great help to cash flow needs,” said Joyce Harris, spokeswoman for the U.S. Bureau of the Public Debt, which conducts the government’s borrowing operations.

Currently, there’s $16.6 billion in unredeemed matured savings bonds, meaning they’re no longer earning interest.

The value of matured unredeemed savings bonds is growing steadily each month, said Jack Quinn, chief executive of SavingsBonds.com. “That means there are a lot of savings bonds out there that are still in drawers, not seeing the light of day,” he said.

But Quinn said: “The redemption of savings bonds has been more pronounced these past nine months than it had been in a while.” Typically, outstanding savings bonds are “somewhere in the neighborhood of $200 billion,” but as of the end of June, it’s dropped to $193.5 billion, he said. “When you see it down to $193 billion, that’s a pretty big departure than what it used to be,” Quinn said.

Savings bonds are mostly bought through employers’ payroll deduction plans and stop earning interest after 30 or 40 years, depending on when they’re purchased.
You have to keep an eye on this because the government won’t notify you that you have a savings bond about to mature.

Generally speaking, you can cash in your Series EE bond a year after the date of purchase, but if you redeem it before it’s 5 years old, you will lose three months of accrued interest.

However, you may be able to redeem bonds sooner if you live in an area that’s been affected by a disaster, such as a flood, fire, hurricane, or tornado.

Interest subject to tax
Before you redeem your saving bonds, you should be aware of the income tax implications.

The interest earned on your savings bonds is subject to federal income tax but can be deferred until redemption or maturity, whichever occurs first. If you haven’t reported the increased value of the bonds as interest each year, you must report all of the interest in the year you cash them in.

Some or all of the interest may be excluded from your gross income if you pay qualified higher education expenses for yourself, your spouse, or a dependent during the year.

Savings bonds also are subject to estate, inheritance, gift, or other excise taxes, whether federal or state.

Redemption strategy
Because of the tax issues involved, there’s a strategy to redeeming savings bonds.

Savings bond interest is compounded, so as your bond gets older, the interest continues to grow and becomes a major part of the bond’s value. “One of the biggest mistakes people make is they cash in their oldest savings bonds,” Quinn said. “Those are the ones that are growing exponentially, so the rule is, if you have to cash in some savings bonds-unless your bond has reached final maturity date-you should hold on to those and cash in the newest bonds first because those bonds have the least amount of interest associated with them and your tax bite is smaller.”

But don’t let tax concerns prevent you from redeeming your bond if it’s matured.
If you don’t cash it in, you’d be giving an interest-free loan to the government, and who wants to do that?

 

 

(c) by Pamela Yip  2009, The Dallas Morning News.