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The future of savings bonds is paperless
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That, Pederson, points out, will cost the government money it is now saving.

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"There are 10.9 billion savings bonds that haven't been redeemed. That's a savings to the government of over $400 million every year."

New bond rules
The flip side is that investors will have to pay federal tax when a bond matures. Currently, a form 1099 isn't triggered until the bond is cashed; under the new system a 1099 will automatically be issued when the bond matures.

While some investors may not realize a bond has matured, others don't cash it because they want to delay paying the tax for a short period. The paperless electronic system will force investors to comply with IRS rules.

"The rule," notes Hollenbach, "is you report the income on a bond that reaches final maturity in the year in which it happens -- whether you cash the bond or not."

Another change related to the electronic transition is the discontinuing of the HH bond sometime mid-2004. Now, when series EE/E bonds mature, investors can exchange them for series HH, continue earning interest and defer paying taxes for another 20 years.

"When the bonds mature the government will force you to cash them in," says Jackie Brahney.

"Some people buy savings bonds with the anticipation of deferring taxes for 20 years and now they've pulled that option."

Hollenbach says the HH doesn't fit in with the government's plan, which is to eventually offer savings bonds and a full range of Treasury bills and notes that investors can buy and redeem electronically.

Dan Pederson opines that the elimination of the additional 20-year deferral could be the government's way of speeding up tax collection.

Not issuing paper bonds printed with a set purchase price means investors will no longer be limited to the typical eight denominations. Currently, if you have $62 available to spend on a bond, but the denominations are $50 and $75, you have to reduce your investment to $50. The electronic system will allow you to invest any amount, including change, up to the maximum calendar year limit.

A major area that still needs work is buying bonds for minors. Regulations require a person to be at least 18 years of age to open a Treasury Direct account. Treasury officials say they'll ask that the rule be changed so minors can have their own electronic statement bonds.

In the near future, perhaps in 2004, current I and EE bondholders will be asked to send in their paper bonds and establish a Treasury Direct account. The exchange will not be mandatory; paper bonds will be honored until final maturity.

Employees who purchase savings bonds through payroll savings will have electronic accounts. Workers will tell their employer how much money to put toward bonds and the employer will send the money to Treasury Direct.

In another move to streamline costs, Treasury Direct will stop accepting credit card payments as of Dec. 31, 2003. All Treasury Direct payments will be debited from or credited to bank accounts.

Officials at the Bureau of Public Debt say they will be launching a campaign to familiarize the American public with Treasury Direct and the changes to the savings bond program.

Bankrate.com's corrections policy -- Posted: Aug. 15, 2003
 
 
More stories by AUTHOR...
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 RESOURCES
Buying bills, notes, bonds and savings bonds
The best time to cash savings bonds
Savings glossary
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