While the U.S. Treasury Department stopped issuing paper savings bond certificates four years ago and encouraged people to trade older ones in for an electronic version, many people still have paper bonds stashed away that they will end up cashing in sooner or later.
What many investors don’t consider when looking to cash in their savings bonds is finding out exactly how much each of them is worth.
That’s not the only mistake they make when it comes to redeeming U.S. savings bonds, according to financial columnist Jane Bryant Quinn of AARP Bulletin. And she said mistakes may be costing bond owners big bucks.
“When cashing in savings bonds, the longer you hold it, the more interest it accumulates until the holding period reaches the 30-year mark,” she said. “After that, no more interest accumulates and taxes are due whether you have redeemed the bonds or not. If you sell before five years are up, you pay a penalty equal to three months interest.”
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Other blunders that can add up to lost income include: cashing in the oldest bonds first; cashing in so many bonds at once that the cumulative, taxable interest puts you in a higher tax bracket; redeeming a bond on the week before a six-month interest payment is due to be paid; and looking only at the bond’s face amount when deciding how many to redeem. Bonds that add up to $3,000 on their face might be worth $6,000 or more, once the interest is counted.
Lynnette Khalfani Cox, CEO of AskTheMoneyCoach.com in Mountainside, N.J., said if a person’s income is close to the next tax bracket, he or she could get knocked into a higher tax bracket by cashing in savings bonds.
“If the person is single and earns $35,000 in 2015, then he or she will be in the 15 percent tax bracket,” Cox said. “But if that same individual cashes in $3,000 in bonds, now his or her income is $38,000, which puts the person in the 25 percent tax bracket.”
In 2015, a single filer is in the 15 percent tax bracket for income between $9,226 and $37,450. But income starting at $37,451 up to $90,750 falls in the 25 percent tax bracket.
Also, Cox said, “It’s a mistake to cash in the oldest bonds first because those are the most valuable. The longer you hold a bond the more it’s worth. So unless you need to cash in all your bonds, it’s best to cash in newer ones first. Let the older ones mature, and they’ll be worth more.”
There are two types of savings bonds investors can buy, Series-EE and Series I bonds. The main difference is that I bonds are inflation protected. EE bonds, which currently pay 0.30 percent, are not.
The process for buying and selling electronic savings bonds is a more automated one thanks to the Treasury Direct online system. Paper bonds present more of a challenge to the owners due to the phase out of the paper process and the fact that many of the bonds are quite old.
“You can likely redeem a savings bond at your local bank or credit union,” Cox said. “Just be prepared to show identification, like a driver’s license. If your financial institution won’t handle the transaction for some reason, or they put limits on how much you can redeem, you may have to go through the Treasury Department.”
Want to know more?
TreasuryDirect.gov provides a calculator to help people calculate the current value of their paper bonds as well as a set of frequently asked questions for bond investors.