What savings bonds are, and how they work
Savings bonds are safe investments issued by the US Treasury. Anyone familiar with a ‘zero coupon bond’ will understand how they work. Series EE bonds, issued back in the days when I was getting them from grandparents, were purchased at a discount to face value and were guaranteed to reach face value at some point in the future. At the time, the purchase price was half of face value, and the face value was guaranteed to be paid in 12 years. Since 2003, this ‘doubling’ period has been stretched to 20 years.
Unlike with many zero-coupon bonds, though, taxpayers have the option of deferring reporting the annual growth in value as income until they were redeemed or until they matured, 30 years after issuance.
Series I-bonds came back in 1998. Unlike EE bonds, I bonds are not guaranteed to double over a period of time, are issued at face value, and return at a rate that is a combination of a fixed base plus the variable rate of inflation.
How much do they return?
The rate of return, particularly on Series EE bonds, is determined at issuance. The current yield on new issues is 0.1%. FDIC-insured bank savings accounts, for some online banks, exceed 15 x that rate! It’s important, though, to remember that they are still guaranteed to double in value in 20 years. For someone who holds a bond for that period, that’s the same as getting about a 3.5% rate of return. Series yield a slightly higher 0.2% PLUS the inflation rate. Right now, the inflation figure they use is at 2.02%, so I-bonds issued today are currently yielding 2.22%.
Despite their low rates of return, savings bonds DO carry some attractive tax benefits. First, they are exempt from state and local income taxes. The benefit of this varies, depending upon where the taxpayer lives. Someone living in New York City will benefit much more than someone in Florida.
Secondly, subject to income limitations, if a savings bond is redeemed to pay for the Qualified Higher Education Expenses of the bondholder or their dependent child, they also escape federal taxation on the accrued interest in the bond. This only applies to bonds issued since 1990.
Getting rid of the stack
If you still have the stack of bonds, it might very well be a good time to look at them. I’d recommend the following:
- Enter the bonds on TreasuryDirect.gov, You’ll be able to see the value of each bond, and will have the option of converting the bond to electronic format.
- Cash in any matured bonds. Taxes are due upon a bond’s maturity. That’s 30 years. Any bonds you come across from prior to 1990 should be cashed, and taxes paid on the proceeds. It’s too late at this point to use tax-exempt strategies.
- Consider continuing to hold 1990’s bonds. These may still be yielding attractive rates, well above the guaranteed levels of today. You’re not going to get ‘full faith and credit’ at 4 to 6 percent, and there’s not a secondary market for these. Holding onto them may be the smart move in this case.
- Treat these as part of your portfolio. If you have a high tolerance for risk, holding a significant amount of your portfolio in savings bonds may not be appropriate. Very few people have a large enough stack for this to matter, but some do!
- Consult a Certified Financial Planner!
Overall, these instruments may not have the appeal they once had – but they do in some cases. You can continue to purchase EE bonds or I bonds. You’re not as likely to accumulate the stack some folks did, but if you DID, now’s the time to attack the stack.