Did you buy US savings bonds decades ago?
Or did your parents or grandparents buy them for you? If they’re collecting dust in a drawer, you might want to take a look at them to see if any of your links have expired. If your bonds are due, that means they are no longer earning interest, and it also means that you might want to consider cashing them.
This article is for informational purposes only.
It is not a substitute for real-life advice, so be sure to consult your tax professional when considering moving with a US savings bond.
You want to keep track of the maturity dates, yields, and interest rates of your bonds, as this will help you determine which bond to redeem when. Fortunately, you can check due dates online now, so it’s relatively easy to determine if it’s time to cash your obligations.
Use savings bonds for educational purposes. If you hold Series EE or Series I Savings Bonds, the interest paid is tax-free, as long as the money is used to pay for eligible education expenses. There are other considerations, so if you find out that you have these types of bonds to cash out, a tax professional may be able to provide you with some advice.
Interest accrued over the life of a U.S. savings bond should be reported on your Form 1040 for the tax year in which you redeem the bond or it reaches its final maturity. This must be done even if you (or the original bond holder) elected to accumulate interest on the tax-deferred bond until the final maturity date. Failure to declare such interest may result in a federal tax penalty.
Remember that US Savings Bonds are guaranteed by the federal government for the payment of principal and interest. However, if you sell a savings bond before maturity, it could be worth more or less than the original price you paid.
US savings bonds are taxed in two ways.
Bondholders choose to defer tax until the bond matures. Once they redeem the bond, they report the interest through a 1099-INT form. Some choose to pay the tax annually before cashing the bond, reporting the increase in the bond’s value as taxable interest each year.
What if you find out that you have held a US Savings Bond for too long?
Another note about reporting interest: If a U.S. savings bond has matured and you haven’t redeemed it, you won’t find a 1099-INT form in your records. Only redemption will bring this 1099-INT your way.
(The interest accrued on the bond should have been reported to the IRS anyway.)
After cashing this old bond, you will then receive a 1099-INT. It will record that the interest on the bond has been earned within the year of the bond’s final maturity.
Plan ahead and keep track. U.S. Savings Bonds have been issued on paper for decades and have often been purchased on behalf of children and grandchildren. Now, US savings bonds are issued electronically. While interest on US Savings Bonds is taxed by the IRS, it is exempt from state and local taxes.
Richard H Mootz, CFPÂ® CERTIFIED FINANCIAL PLANNER â¢ Professional, is a registered representative and offers securities through Securities America, Inc., a registered broker / dealer, FINRA / SIPC member. Advisory services offered by Securities America Advisors , Inc., An investment advisory firm registered with the SEC. Mootz Financial Solutions and Securities America are not affiliated.
Richard H Mootz, CFPÂ® CERTIFIED FINANCIAL PLANNER â¢ professional can be contacted at (530) 877-7007 – by e-mail [email protected] or visit the website at www.mootzfinancialsolutions.com. Securities America and its advisers do not provide tax or legal advice. Please consult your tax or legal professional regarding your personal situation. CA insurance number 0C75924
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