Savings Bonds

[yankeeyosh]

I have some Series 'E' bonds from when I was born. They have not reached final maturity yet...they will next April (although they reached original maturity years ago). I want to reinvest them into a higher yielding account. Are there any disadvantages (e.g. taxwise) for turning them in before final maturity?

[redav]

No. There are no disadvantages. You will have to pay regular income tax on the interest, but that's about it.

[PeakDream]

Income tax bracket is generally higher than long term capital gain tax bracket (15% max i think). I tho "E" and "EE" series are educational bond, not sure if there are any special tax benefit behind it. Try avoid paying income tax or deferred as much as you possibly can.

[yankeeyosh]

Income tax bracket is generally higher than long term capital gain tax bracket (15% max i think). I tho "E" and "EE" series are educational bond, not sure if there are any special tax benefit behind it. Try avoid paying income tax or deferred as much as you possibly can.

So I shouldn't touch them until I'm 30? I know a lot of people get bonds when they're born...but no one mentioned what they do with them.

[PeakDream]

You will pay income tax (federal only, no local or state tax) whenever you redeem or the bond mature. If I remember correctly, "E" or "EE" series bonds purchase price was 1/2 the face value. Your taxable value would be the difference between the purchase price and the redeemed values. I would imagine it can be significant. I personally would probably trade in for some other types of bonds that can continue build wealth without tax implication.

If the sum is large, I would highly recommend you ask professional.
***I'm not a professional financial planner, just someone who pay attention to personal finance.***

[slimjim]

http://www.treasurydirect.gov/indiv/tools/tools_savingsbondcalc.htm

This is the be-all and end-all site on bonds. you will be able to calcualte exactly what your bond it worth and how much will be taxable.

[nikorock28]

Yes, the above link is great and that is what I have used. There are no special tax implications for series E bonds. As others have said, when you cash them out, you just pay federal tax on the interest. The interest is anything that has accrued above the purchase price. Therefore, it might be best to cash them out gradually so as not to vault you into a higher tax bracket. Obviously, it is best to cash them all out when you have a lower annual income in order to pay the least tax as possible.

[PeakDream]

Do you need the money? If you don't, can't you trade them in for another bond? When I was looking at bonds a few years back, I vaguely remember you can trade those bonds and defer the tax.

[redav]

My family also bought bonds for me each year when I was growing up. I began cashing them last year. The current yield on all my bonds is 4%, which is less than other long-term options I have available to me (like my mortgage). So I am cashing a few each year and moving the money to where it is more profitable.

As far as taxes, series E is just like a bank CD. There is no special tax break that I am aware of. I also do not know of a trade-in or exchange program as a way to avoid paying taxes (but that does not mean there is not one). There ARE special tax laws associated with series EE and I bonds, though I have not researched that much. I will not begin cashing my EE bonds for another year or so. For me, the bonds only changed my taxable income by a few hundred dollars (of course, the larger the bond denomination will have a greater effect), so their effects on my tax bracket were pretty much irrelevant.

[PeakDream]

I wasn't thinking about the raising TAX bracket. It's the fact that you have to pay 20-28% federal income tax, vs 15% capital gain tax. That means off the bat, you lose value on your money @ 5 - 13% depends on the tax rate. I'm pretty sure you can trade in your bonds for another, not sure if you can do it with "E"/"EE" series, but no harm in finding out. I just hate paying tax when I don't have to.

[yankeeyosh]

I wasn't thinking about the raising TAX bracket. It's the fact that you have to pay 20-28% federal income tax, vs 15% capital gain tax. That means off the bat, you lose value on your money @ 5 - 13% depends on the tax rate. I'm pretty sure you can trade in your bonds for another, not sure if you can do it with "E"/"EE" series, but no harm in finding out. I just hate paying tax when I don't have to.

So when do you NOT pay the capital gains tax? When they fully mature? Please advise.

The total face value of the bonds is about $800 or so.

[PeakDream]

So when do you NOT pay the capital gains tax? When they fully mature? Please advise.

The total face value of the bonds is about $800 or so.
You always have to pay tax, the idea is to pay the least amount. If you retire, you don't have any other income, your income tax bracket will be a lot less than what you have now, therefore, paying less tax. For example, the total face value of the bond is $800, you paid $400 for it. Your taxable value is $400, assume your tax bracket is at 28%, that means you have to pay $112 in tax. Let's say you can defer this somehow until your retirement, let's say your tax bracket is now 20%, your tax on that $400 is $80. A $32 difference. While this number is small, but when you apply this to a general retirement planning, the difference can be significant. The question for you really is, do you need that $800 now? If not, why not defer it for later?

[redav]

So when do you NOT pay the capital gains tax? When they fully mature? Please advise.
The 15% capital gains tax does not apply to your situation. It is for investment in stocks. Your income from these bonds will be taxed like you earned interest from a bank account.

What PeakDream is describing is a method of tax deferment. There may be a form of tax-deferment for EE and I bonds; I cannot say. I have ever heard of such a thing for E bonds. Technically, the interest with govt bonds grows tax-deferred for the length of time you hold them (you do not report any income until you cash them). That means you can let them earn money, and not pay taxes on it, for up to 30 years.

There is no difference or penalty for cashing govt bonds at any time if they have been held for more than 5 years. That is one of their main strengths. The longer you hold it, the more it earns (they will be worth far more than their face value if you've had them for 20+ years). However, at 30 yrs they stop earning income, so you would never hold one for longer than that.

[steph78]

There is no difference or penalty for cashing govt bonds at any time if they have been held for more than 5 years. That is one of their main strengths. The longer you hold it, the more it earns (they will be worth far more than their face value if you've had them for 20+ years). However, at 30 yrs they stop earning income, so you would never hold one for longer than that.
And for this reason I'd recommend cashing them out as soon as possible and investing the money elsewhere. Savings bonds do not earn at a very high rate - you'd do better taking the money and putting it in an online savings account like ING or Emigrant Direct that has a higher interest rate. It doesn't really matter tax-wise whether you cash out the bonds now or when you're 30 so you might as well make the money work for you. I cashed out all my savings bonds from when I was born in 2005 (when the bonds were 27 years old rather than 30), and that year I got a tax form from my bank reporting the interest that had been earned on the savings bonds - that got added to the income on my W-2, etc. and I just had to pay regular taxes on it - no capital gains or anything.