When I was a kid I often received savings bonds as gifts from grandparents and relatives. My parents diligently kept them in the family's fireproof box and I remember taking them out and depositing them into my bank account as I prepared to leave for college. Fast forward a couple decades and now I have savings bonds for my children in our family safe.
A quick review of Series EE Savings Bonds
The traditional, or paper, bonds are sold for half their face value of $50, $75, $100, $200, $500, $1000, $5000, and $10,000. When the bond reaches maturity it is worth its full face value. The maturity date is based on current interest rates at the time of issue. The lower the interest rates, the longer it will take for the bond to mature. Newer electronic bonds are sold at face value. As time passes the value of the bond increases as interest is credited to the bond.
Bonds can be redeemed at any time but bonds redeemed within the first 5 years forfeit the three most recent months of interest credit. Even when the bond reaches maturity the government continues to credit interest until the bond reaches its final maturity date. At that point the bond has reached its highest value and additional interest will be credited.
These bonds are not known for their outstanding returns but rather their safety, ease of use, and tax deferral of the interest credited until the bond is redeemed or it has reached its maturity date.
The potential problem
Here is where it gets a bit sticky. According to IRS publication 550, the interest deferred on savings bonds must be reported in the year the bond matures, regardless of whether the bond was redeemed or not.
I have been unable to verify the figure, but one article I recently read indicated that according the US Treasury on September 30, 2008, there were $16.3 Billion in outstanding bonds which had reached final maturity and tens of billions of about-to-mature bonds in the pipeline. Not only does that amount to an interest free loan to the government, but holders of these bonds are subject to the risk that the IRS could declare that they under-reported their income by not recognizing the accrued interest on matured bonds.
Learn more
- Savings bonds are a great way to save on taxes, as long as you follow the rules @ WalletPop
- EE Savings Bonds in Depth @ TreasuryDirect.gov
A Crop That Never Fails. 1944 WWII bond poster for the 6th War Loan by Joan Thewlis
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