Hold or fold older US savings bonds?

Don TaylorDear Dr. Don,
I have 99 $100 EE savings bonds issued from May 1993 to November 2000. Bonds from 1993 through mid-1995 pay an interest rate of 4 percent, while the later bonds are indicated at below 1 percent.

Can the 4 percent rate increase or decrease if I allow those bonds to reach final maturity? I'm not sure what my options are for possibly reinvesting them or even if it is worth it. Would I be better off cashing them out at final maturity?

-- Lynda Longterm

Dear Lynda,
The U.S. Treasury makes a distinction between a Series EE savings bond's original maturity period and its extended maturity period out to a final maturity. Why the distinction? The Treasury guarantees that a Series EE bond will be worth at least face value when it reaches its original maturity date. Your Series EE bonds all have a final maturity date of 30 years, but their original maturity dates vary depending on when the bonds were issued.

The table below shows the maturity breakdowns and current yields of your Series EE savings bond portfolio.

Savings bonds: Maturity and yield

Bonds issuedOriginal maturityExtended maturityFinal maturityCurrent yield
May '93 - April '9518 years12 years30 years4.00%
May '95 - April '9717 years13 years30 years0.59%
May '97 - Nov. '0017 years13 years30 years0.63%

The bonds stop earning interest at their final maturity and, if you deferred paying income tax on the interest earnings, the tax bill comes due the year they mature. That's unless the bonds qualify for the education tax exclusion and you use the proceeds to pay qualified higher education expenses from the proceeds.

I suggest you don't sell the savings bonds you bought between May 1993 and April 1995. Unless the U.S. Treasury announces a change in the guaranteed rate prior to the savings bond's original maturity, and most of the bonds are already past that point, you'll continue to earn 4 percent on these bonds until their final maturity.

For the remainder of the bonds, it makes sense to hold them at least through their 17-year original maturity. That's because, if a Series EE Bond has not earned enough interest to be worth an amount that is double its purchase price on the date it reaches original maturity, the U.S. Treasury will make a one-time adjustment on the original maturity date of the bond to make up the difference. That should raise your yield on these bonds to about 4 percent over that original maturity. Past that date, it's up to you. The government will go back to paying a variable rate on the bonds, and you'll earn about what you'd earn on a short-term certificate of deposit, with the continued ability to defer income tax on the interest earnings until the savings bonds reach final maturity.

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