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Holding on to old savings bonds

Dear Dr. Don,
My mother is 80 years old. She has over 200 saving bonds. Most of them are 30 to 35 years old. Should she cash them in, or save on the taxes by exchanging the bonds for Series H or Series I bonds?
-- Carol Compounding

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Dear Carol,
Savings bonds eventually stop earning interest. How long they earn interest depends on the series and when they were issued. The following information and table comes from the Bureau of Public Debt's Web site:

Bonds stop earning interest at final maturity. The following table shows final maturity periods for Savings Bonds and Savings Notes:


Issue date Final maturity
5/41 to 11/65
40 years
12/65 to 6/80
30 years
All issues
30 years
6/52 to 1/57
29 years, 8 months
2/57 to 12/79
30 years
All issues
20 years
All issues
30 years
Savings Notes
All issues
30 years

For Series E and EE savings bonds there is a difference between a bond's initial maturity and its final maturity. The initial maturity is the maximum amount of time it takes for a savings bond to be worth its face value. Series E and EE savings bonds continue to earn interest after initial maturity, through an extension period(s) but at a different interest rate than the rate applicable through the initial maturity. The final maturity for these bonds, which is the initial maturity plus any extension periods, is shown in the above table.

The option to reinvest the bonds and defer the income taxes due on the earnings is no longer available. As of Sept. 1, 2004, savings bond investors are no longer able to reinvest series HH or H bonds, or exchange EE or E bonds for HH bonds. Series E and EE savings bonds also can't be exchanged for Series I savings bonds.

Although investors can no longer reinvest to continue to defer federal income taxes on the Series E and EE savings bonds, investors in these bonds can defer federal income taxes on the interest earnings until the bonds are redeemed or they reach final maturity. Deferred earnings become taxable at final maturity, even if the savings bond isn't redeemed.

I suggest working with a tax professional to manage the tax implications of any savings bonds that have stopped earning interest because they've reached final maturity. For bonds that haven't reached final maturity, the decision to redeem and reinvest the proceeds should be based on the interest income the bonds are generating and managing the tax impact of redemption -- another reason to work with a tax professional. For bonds that have matured, there's no tax advantage to holding on to them, and they've stopped earning interest, so it's an easy decision to redeem and reinvest.

Bankrate.com's corrections policy -- Posted: Jan. 25, 2006
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