What to do with inherited savings bonds
My father passed away a while back. In addition to inheriting
his IRAs and 401(k), he also left me a substantial amount in U.S.
savings bonds. My father purchased the savings bonds about 16 years ago,
so they have accrued a substantial amount of interest. The current yield
on the bonds is 4 percent.
I feel that although the bonds are a very
secure investment vehicle, the interest rate is far too low. I was considering
cashing out the savings bonds and placing them into more aggressive investment
vehicles, like stock-based mutual funds.
That's where my question
and concern come up. If I cash out the savings bonds, I'm concerned I'll
pay a hefty amount of taxes. I make a good salary, and I have maxed out my
What would be the
best scenario for me?
- Cash out the savings bonds and
move them into more aggressive investment vehicles.
- Keep the savings bonds
until maturity, but place my other investments in more aggressive vehicles --
like international and small cap mutual funds.
- Keep everything as is.
for your advice,
Key in all of this is to make the decision that's right for the
overall portfolio and to not look at the savings bonds in isolation. Also
key is how the bonds were registered and if your father's estate paid any of the
tax bill on the interest income.
It's possible that your father's
estate reported the interest income up to the date of his death and the estate's
federal income tax return paid those taxes. Talk to your tax adviser if you're
not certain about what was done about the interest income earned from purchase
up to the date of death. The Treasury Direct Web site page, titled "Death
of a Savings Bond Owner,"
has more complete tax information.
If no taxes were due, then the tax-deferral feature
of these bonds keeps more money at work earning 4 percent than you
can put to work after redemption and taxes only to earn 5-plus percent
in a money market account. There's also the consideration that
there's no state or local income taxes due on the interest earnings,
which makes holding these bonds until maturity a little more attractive
than you'd think at first blush.
Holding on to the savings bonds and changing the investment
mix of your other accounts can make sense if there's not a big tax impact from
those changes and you're willing to continue owning these savings bonds yielding
4 percent. It's easy to adjust your holdings in tax-advantaged accounts without
creating a big tax obligation.
It sounds like you're managing
enough personal wealth that you shouldn't be trying to do it yourself. Find
a fee-based financial planner to help you sort through these issues. An earlier
Dr. Don column, "Picking
a financial adviser," can help you find that planner.