Cash in savings bonds carefully

Don Taylorq_v2.gifDear Dr. Don,
I own three Series EE savings bonds with the following purchase dates and face value amounts:

●  $500 (June 1983)
●  $1,000 (December 1993)
●  $500 (May 1994)

When should I cash them in? Do I just take them to my bank and let them cash them?

Are all three at full value as of July 24, 2009?
-- Suzanne Savings

a_v2.gifDear Suzanne,
Series EE savings bonds issued in the 1980s and early 1990s have an original maturity of 20 years, and an extended maturity of 10 years, for a total of 30 years until the final maturity of the bonds.

These bonds were purchased at half their face value. Over their original maturities, the bonds increase in value to become worth at least the face amount. During the extended maturity period, the bond continues to earn interest according to the terms of the extension period.

The Series EE bond you own from 1983 will reach its final extended maturity in June 2013. At final maturity, the bond stops earning interest. Deferred interest earnings become taxable when the bond is redeemed or matures.

The TreasuryDirect Web page "When Your Bonds Increase in Value" explains why, for your bonds, it makes sense to wait until an interest payment month to redeem the savings bond.

The interest rate earned by your bonds for any six-month interest period depends on the terms of the savings bond when purchased. The TreasuryDirect Web page "EE/E Bonds Issued before May 1995" explains the different approaches to establishing an interest rate depending on when the savings bonds were purchased and the bond's current age.

An easy way to get around all the particulars concerning the interest rates on your bonds is to use the Savings Bond Wizard and input the information about the bonds. The Savings Bond Wizard is available as a download on the TreasuryDirect Web site. I used it for your bonds and came up with the following information:

EE savings bond details
Face valueIssue datePriceInterestValueRateYieldNext interest dateFinal maturity date

Alternately, you can just use the savings bond calculator to find out the information without downloading the program. That would allow you to calculate the value as of the July 2009 date. Pay attention to the next accrual (interest) date, however, so you know when the next interest payment is credited to the bond.

Use the rate column to see what you're currently earning on the savings bonds. The yield column shows the return over the time you've owned the bonds. I'd use the rate column, updated to reflect the new rates available to you at the next interest date, to decide whether or not to redeem the bonds.

If you've been deferring the income tax due on the interest earnings, the earnings are reported as interest income for the tax year the bonds are redeemed.

The savings bonds purchased in the early 1990s may qualify for the Savings Bonds in Education program. If that's the case, the interest earnings are excluded from federal income tax when bonds are used to finance education. Restrictions apply -- see the Education Planning page on the TreasuryDirect Web site for more information.

Read more Dr. Don columns for additional personal finance advice.

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