investing

Savings bond taxes due at maturity

Don Taylor

Today, I look at two questions related to maturing savings bonds.

q_v2.gifDear Dr. Don,
I have a Series E savings bond that matured April 1, 2009. Can it be rolled over into a Series I savings bond without withdrawing the interest?

-- Ray Rollover

a_v2.gifDear Ray,
Tax-deferred rollover options no longer exist for maturing saving bonds. The option ceased to exist when the U.S. government stopped issuing Series HH savings bonds Sept. 1, 2004. Prior to that date, you could exchange Series E/EE savings bonds for Series HH savings bonds and continue to defer the interest income from the Series E/EE savings bonds.

You can use the proceeds of your matured Series E savings bond to buy a Series I savings bond. However, the Series E savings bond's interest earnings, assuming you deferred paying taxes on those earnings, is fully taxable in the year the bond matures or is redeemed, whichever comes first.

Here's how the TreasuryDirect Web site explains it on the Web page "Series EE/E Savings Bonds Tax Considerations":

The interest earned on your savings bonds is subject to federal income tax, which can be deferred until redemption, final maturity or other taxable disposition, whichever occurs first. Savings bonds are subject to estate, inheritance, gift or other excise taxes, whether federal or state.

A common misconception by savings bond owners is that the deferred interest isn't taxable income until you cash in the bond. There's no tax benefit in sitting on matured savings bonds that have stopped paying interest.

q_v2.gifDear Dr. Don,
I have Series E savings bonds that are no longer earning interest. I don't want to incur the interest on my income taxes. I can't convert these bonds to the H series. Is there anything I can do to delay declaring the interest on E series savings bonds?

-- John Juncture

a_v2.gifDear John,
It's time to pay the piper. As I discussed with Ray in the preceding letter, the bonds are taxable once the issue has reached final maturity.

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