“My Grandpa left me some savings bonds that he invested in many years ago when I was young. I am not sure what they are up to these days, I wonder if they are still earning any interest or if I should cash them in…”
I have personally asked these questions and I know several people who have asked these same questions. When you are given bonds at a young age, it is natural not to understand how they work. If they are something that your Grandpa gave you, then chances are it was a savings bond.
Remember from our overview of the different types of bonds, a savings bond is popular because it is backed by the U.S. government and pays out all interest in one payment at maturity. This is an ideal investment to give to children since they have no need for a steady income. At the point of maturity, the child will likely be grown up and Grandpa’s investment will be perfectly timed.
Therefore, the savings bond is a nice way for a grandparent or other family member to set aside some money for a child to use at a later time. The money will likely earn more interest than sitting in a savings account.
First, What do You Have?
When you are looking at a bond that was purchased 20+ years ago, you may not know precisely what you are looking at. There are multiple types of savings bonds that you could have, and it is essential that you know what you have before you are able to know what to do with it.
Assuming that the bonds you hold are legitimate and in your name, you should first check the expiry date. If it has not expired, you should hold onto it since it is still earning interest. If you must cash it in for any reason, you may, but there are few things to know.
Both I and EE series bonds cannot be cashed in within 12 months of their purchase. Within 5 years, the treasury will charge you a fee equal to three months of interest. After this, there are no penalties.
As far as tax goes, you will still be required to pay tax on the accrued interest.
To report this, you file a 1099-INT form, and report the accrued interest on the “interest” section of your tax return (assume you make over $10 of interest).
Your bond is more likely EE or I series, but may also be HH. EE/I have a lifespan of 30 years and HH has one of 20 years.
If your bond is neither of these times, it may be an older type. You can look at other types on the Treasury website here (a site that is a great resource for information on bonds, by the way).
Once you have an expired bond, there is no reason to hold onto it further. You should cash it in this point.
You have a few options here, with a paper bond, most financial institutions will have no problem cashing, but the easiest way is probably to take it into your local bank or credit union. Call ahead to make sure that they will indeed cash savings bonds, since not all banks will.
At the bank make sure to have identification as well the death certificate of the holder if he/she has passed away and you are named as the beneficiary.
Another option is to mail it into the Treasury department.
Despite the fact that bonds past their maturity are not earning any interest, there is a good reason why someone might wait for a while to redeem their bonds.
Since interest earned from savings bonds is taxable, redeeming a bond will place tax obligations upon the holder.
There are tax breaks for certain situations where the beneficiary is planning to use the money to pay for higher education. In order to take advantage of this, just make sure that the education expenses incur in the same tax year that the bonds are redeemed, and that the bonds are either EE or I series savings bonds issued after 1989.
Also make sure that the institution that you are planning to attend is eligible.
Thank You Grandpa (or whoever)!
If you do not have a specific purpose in mind for your cash, then consider placing the proceeds directly in a retirement savings. This will afford you some tax breaks as well.
Savings Bonds are a very wise investment to give to others. They are ideal for giving to children who will need the money by the maturity date.
Investing in savings bonds today, especially on behalf of someone else is a wonderful and smart way to set aside a little money at a time when you can in order to benefit yourself (or someone else) with interest down the road.
It is a good discipline to develop now so that you can be sure to take care of yourself and your loved ones when times might not be so stable financially in the ever-unpredictable future.