What to do with Series E savings bonds?

Don TaylorQuestionDear Dr. Don,
I have three $500 saving bonds that date back to 1975. The bonds are now worth around $2,500-plus each. What should I be doing with them, cash in and buy more, or leave as is? If I am to cash in for more, am I taxed on the money?
-- Rick Redemption

AnswerDear Rick,
Series E savings bonds issued in 1975 stopped earning interest in 2005 at the bond's final maturity. There's no point in holding on to them and giving the government an interest-free loan.

If you deferred interest on the savings bonds until maturity, the interest income was taxable in the year the bonds reach final maturity. The TreasuryDirect Web page, "Treasury Securities that have Stopped Earning Interest," describes the savings bond issued dates that have since matured. When you cash in the savings bond, the financial institution will issue a Form 1099-INT for the interest earnings.

The 1099-INT should reflect the year the interest earnings became taxable -- that is, the year the bonds matured. That may necessitate you amending your tax return for that year, and there could also be an interest penalty levied on top of the income tax due. Talk to your tax professional, or ask the Internal Revenue Service by calling its toll-free Telephone Assistance for Individuals at (800) 829-1040.

Savings bond owners used to be able to exchange maturing Series EE/E savings bonds for Series HH/H savings bonds, and by making the exchange continue deferring the income tax earned on the matured savings bond. Interest income on the Series HH/H, however, is taxable in the year earned. The U.S. government stopped issuing Series HH savings bonds in September 2004.

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