Dr. Don Taylor, CFA, Bankrate.com advice columnist Time to cash in savings bond

Dear Dr. Don,
Must or should you cash in a Series E savings bond at its 30-year peak? If so, can you roll it over into a CD or other investment without having to pay taxes on the interest? Do you have any other suggestions as to what to do with a 30-year-old Series E bond?
-- Karen Compounding

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Dear Karen,
Two things happen when a savings bond reaches its final maturity. First, it stops earning interest. Second, if you deferred paying federal income tax on the interest, all of the bond's interest earnings become taxable -- even if you don't redeem the bond. So there's not much point in not cashing in the bonds when they reach final maturity after 30 years.

You used to be able to exchange Series EE/E savings bonds for Series HH/H savings bonds, but the government stopped issuing Series HH/H bonds in September of 2004. The Treasury Direct Web site has a page that answers the question, "Are Your Savings Bonds Still Earning Interest?" and explains the federal tax impact if they are not.

So cash in the bond and reinvest the money. Where you put it depends on when you expect to need the money and how you feel about risk. An insured certificate of deposit, like a savings bond, doesn't have any risk of losing principal, but unlike a savings bond you can't defer taxes and you'll owe any state and local income taxes along with federal income tax on the CD interest income. You can shop rates in your market or nationwide on Bankrate.

Beyond protecting principal you want to preserve the purchasing power of this investment against inflation. If you want look back to see how 30 years of investing in a savings bond compares to 30 years of inflation, go to the Bureau of Labor Statistics Web site and use its CPI Inflation Calculator to see what $37.50 from 30 years ago can buy in today's dollars. Why $37.50? That's what a $50 face value Series E savings bond purchased in November of 1976 cost.

It takes $134.12 in today's dollars to buy what $37.50 could buy in 1976. Using the Savings Bond Wizard you can see that the bond is worth $275.30 at maturity with $237.80 of that as interest earnings. If the applicable marginal federal income tax rate is 25 percent, there's a tax obligation for about $60 in taxes leaving $215 to reinvest. You can input the particulars of your bond(s) to find its value.

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "Financing a home," "Saving & investing" or "money."

Bankrate.com's corrections policy -- Posted: April 4, 2007
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