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Saturday, May 4, 2024
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Case Studies |
Seeing Double with U.S. Savings Bonds, Part 2
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Case:
Bill Bonds is a retired construction worker. While still an avid home improvement enthusiast, Bill hung up his hard hat after 40 years in the business. During his working years, Bill invested in several different places, such as an IRA and a deferred commercial annuity. Bill also purchased U.S. savings bonds.
Specifically, Bill bought U.S. Series EE savings bonds 20 years ago for $5,000. The face value of the bonds was $10,000. Bill's bonds have reached the original maturity date - 20 years from the bond's issue date. He knows he has several options with respect to the savings bonds. However, Bill does not know what he should do next. For instance, he can redeem the savings bonds, continue to hold them or convert them. Bill also wants to discuss the charitable giving options, if any, with respect to the savings bonds.
Question:
What options does Bill have for his bonds? What are the tax consequences of each option?
Solution:
U.S. savings bonds are government backed bonds issued by the Department of Treasury. Series EE (formerly Series E) are a very popular type of savings bonds. They are purchased at a discount and are guaranteed a certain value upon "original maturity," which is 20 years after the issue date. The increase in value from the purchase price to the original maturity price reflects accumulated interest income.
Fortunately, this accumulated interest income goes untaxed each and every year. It is not subject to federal, state or local income taxes. However, a taxpayer may elect to realize the interest income each year. See Sec. 454(a). Because of the tax liability that results from realizing savings bond interest income each year this is a rare decision.
"Option #2 - Continue holding the savings bonds."
In the event Bill does not want to redeem his savings bonds (Option #1), he may keep his Series EE bonds beyond the 20-year maturity period. In that instance, the savings bonds will continue to earn interest until "final maturity," which is 30 years from the issue date. In other words, Bill's savings bonds will continue to accumulate interest income for another 10 years. This is a good solution if Bill does not need additional income or principal immediately.
Upon final maturity, the savings bonds will stop paying interest. In fact, it is not uncommon for persons to own savings bonds that have quit paying interest. In many cases, they have simply forgotten about the savings bonds or they do not realize the savings bonds are not earning interest anymore. In either case, it is a windfall for the U.S. government. Therefore, once final maturity is reached, Bill should revisit his original options again, i.e., redeem, convert or give.
Before proceeding with the hold option, Bill wants to investigate further. In part 3, Bill will review the pros and cons of "rolling over" the Series EE savings bonds.
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