My daughter recently won a contest where the prize was a $50 savings bond. I went to the bank to dutifully add the bond to our safe deposit box, realizing in the process that I haven't opened the box in quite some time. In the box, I discovered savings bonds I received as gifts from my college graduations (1992 and 1995), my wedding (1994), and from the years my children were born. I was about to just toss the new bond in with the lot, but then I wondered what and when I was ever going to do something with these pieces of paper.
When it came right down to it, I realized that I didn't really know that much about savings bonds. I thought that you purchased a bond at half its face value (for example, a $50 bond costs $25 to purchase). Then, after a really long time, the bond was actually worth the face value. While that is not technically incorrect, it certainly isn't everything I needed to know about savings bonds. Here are a few things I've learned:
-You need to know what kind of bonds you have. There are two types of bonds sold today: Series EE and Series I. Each type of bond differs in the way they mature and earn interest.
-The purchase price of a Series I bond is equal to the face value. Series I bonds have a fixed interest rate but also earn an inflation rate to protect their purchasing power.
-Series EE bonds are purchased at half their face value and aren't worth face value until maturity—about 17 years after purchase (this is the really long part I was talking about!)
-Some older bond types such as Series E, H, and HH should be cashed in ASAP because they have stopped earning interest. Check TreasuryDirect to see if you bond has stopped earning interest.
-You do not necessarily need to wait a "really long time" to cash in your bonds. You can cash in bonds after one year, but you will have to pay a three-month interest penalty if you cash the bonds within five years of purchase. Obviously, if you cash a half-priced Series EE bond before maturity date, it won't be worth face value (you would get what was originally paid for the bond plus interest).
-You can keep Series EE and I bonds for a really, really long time if you want to. Both Series EE and I bonds will continue to accrue interest for 30 years.
-You do not have to pay state or local income tax on your earnings from savings bonds. You will pay federal income tax on interest earned at redemption or final maturity. There are some tax benefits are available if you use the bonds to pay for an education.
-There are some really great online tools to help you manage your bonds. Check out this free Savings Bond Wizard from TreasuryDirect.
Bottom line is that my instinct to simply toss the bond into the box was a good one. Because I have Series EE bonds, most of them have not yet matured. My oldest bond is close, but since I will continue to earn interest for another 13 years, I am going to let sleeping dogs lie. Sure, I could probably better invest the money, but at least it's safe and sound. Plus, since I visit the box so infrequently, I am very unlikely to cash the bonds on a whim. If I am patient enough, I can use the money to pay help pay for my childrens' college educations (wishful thinking!) and take advantage of that tax break.