Dear Dr. Don,
My two kids, ages 13 and 17, have been receiving two or three $200 savings bonds every year since they were born. Would it be a better investment to cash them all in — regardless of whether they have matured — and put the money in CDs or money market investments?
— Bonnie Bonds
You wouldn’t buy a “pig in a poke,” so don’t sell one, either. Before making the decision to cash out, understand what the children are holding in their savings bond portfolio. There are going to be some real gems in there, and with CDs and money market instruments not offering high yields, you may be surprised how well the savings bonds are doing.
Download the “Savings Bond Wizard” from the TreasuryDirect Web site and input the children’s savings bonds. It will tell you the average yield on each bond over its holding period and what each bond is earning for the current six-month period.
Keep in mind that savings bonds have a minimum holding period of 12 months. If a bond is redeemed in the first five years after its issuance date, the bond owner will lose the last three months of interest earnings as an early redemption penalty. The kids will have quite a few bonds that fit in that category.
If you’re deferring the interest income until maturity, you may want to consider electing to pay interest annually as it is earned. I don’t know enough about your finances to say for sure that it’s the way to go, but it is something to discuss with your tax professional.
See the “Methods of Reporting Interest” section on the TreasuryDirect Web page “Series EE/E Savings Bonds Tax Considerations” for additional information.