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Columns: Dr. Don
Don Taylor, Ph.D., CFA, CFP   Expert: Don Taylor, Ph.D., CFA, CFP
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Qualified expenses may escape taxation
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Bonds may cut daughter's college costs
 

Dear Dr. Don,
In November 1992, I purchased two $100 Series EE savings bonds with a combined $200 face value. The bonds state that interest ceases 30 years from the date of purchase.

My daughter is now 18 years old and getting ready to start college this spring. Can she cash in the bonds or should she wait? I know it's not a lot, but it can help her toward buying schoolbooks. Can it be cashed at any bank and do all banks pay the same? Any help would be greatly appreciated.
-- Sam Savings

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Dear Sam,
A bank is acting as the agent of the federal government and the savings bonds are worth the same regardless of which bank she picks to redeem them. She can cash her savings bonds at many local financial institutions, but the Treasury doesn't maintain a listing of banks in an area that redeem bonds.

As of Nov. 1, 2007, the combined value of the two $100 bonds was $228.96. She can use the "Savings Bond Calculator" on the TreasuryDirect Web site to update this value each month. Her savings bonds, purchased in November 1992, currently earn 4 percent interest.

Timing the redemption can keep her from losing interest income. From the TreasuryDirect Web site:

Bonds issued May 2005 and after
Series EE Bonds issued May 2005 and after increase in value every month. The bonds’ interest rate is fixed and compounded semiannually.

Bonds issued May 1997 and after (through April 2005)
Series EE Bonds issued May 1997 and later increase in value every month. The bonds' interest rate is compounded semiannually. The rate announced each May and November for these bonds is applied to a bond for the six-month earning period.

Bonds Issued before May 1997
For most bonds issued earlier than May 1, 1997, interest is added every six months. If you know the month and year when your bond was issued, the tables below will help you determine when your bonds increase in value.

Series EE Bond Semiannual Interest Accrual Dates
The following bonds increase in value as shown below:

  • Series EE Bonds issued before March 1993.
  • Series EE Bonds issued May 1995 through April 1997.
  • Series EE Bonds issued from March 1993 through April 1995.

Value increase schedule
If month of issue is: Values increase on 1st day of:

*Please Note: EE Bonds issued March 1993 through April 1995 increased in value monthly the first five years and semiannually after that, unless monthly increases are needed to make sure the bonds earn at least 4%.

It's a good idea to cash a bond in a month in which interest is added to its value. For example, a bond with an issue date of February 1990 increases in value every Aug. 1 and Feb. 1. If you cash this bond in July, you'll get the same amount as if you had cashed it the prior February; but if you wait until Aug. 1 to cash the bond, you'll get another six months of interest.

When your daughter redeems her paper savings bonds, the financial institution paying the bonds will report the interest earned to both your daughter and the IRS. You will receive an IRS Form 1099-INT from the financial institution, either at the time she redeems her bonds or shortly after the end of the year in which she redeemed the bonds.

If the bonds were issued in your name with your daughter as beneficiary, you may be able to redeem the bonds to pay for qualified college expenses and not owe federal income tax on the interest earnings. A qualified education expense does not include room and board or books.

The TreasuryDirect Web page on "Education Planning" explains the program in detail.

Bankrate.com's corrections policy -- Posted: Dec. 4, 2007
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