Redeeming matured bonds

Investor interest in savings bonds is higher that it has been in recent years. As I explained several months ago, Series I bonds, which adjust to inflation, had a yield of 7.12% for the six months ending May 1. The rate for the coming six months is expected, as I write this, to be 9.62%.

The only place to buy savings bonds now is through the online government website, TreasuryDirect.gov, where it’s easy to set up an account and make your purchase with money taken directly from your bank account. You must hold the savings bonds for at least one year. And if you sell before holding for five years, you’ll lose the last three months of earned interest.

There is a limit of $10,000 per person per year for purchases of these electronic savings bonds. You can also buy up to $5,000 per year in paper bonds using your tax refund.

But with all the attention on today’s high rates for bond purchases, there’s another issue that many savings bond owners face: what to do with your old Series EE savings bonds as they mature and stop earning interest. At that point they must be redeemed.

Series EE bonds were first issued in 1980. All Series EE bonds mature after 30 years and stop paying interest. Series I bonds were first issued in 1998, so none have matured yet.

Find the value of your old paper savings bonds at TreasuryDirect.gov using their savings bond calculator. Enter the denomination, issue date and serial number from the paper bond to get its current value and maturity date.

Don’t jump to cash in old savings bonds just based on the current market value. Many older bonds may carry high “base rates” that will last the life of the bond, along with current inflation adjustments.

When you cash the bonds, you will owe ordinary income taxes on all the accrued income (unless you were one of the very few who elected to pay taxes along the way). Treasury or the financial institution that cashed the bonds will send you a 1099 for your taxes.

That gain could impact the taxability of your Social Security benefits, or even your Medicare Part B premium if you have a big jump in income in any one year. Consult your tax adviser before redeeming bonds.

In the olden days, practically every bank would sell and redeem savings bonds. Not so today. If your bank doesn’t cash savings bonds (and many don’t, especially for non-customers), you can send the bonds — unsigned — to the Treasury Department, along with Form FS 1522, which can be downloaded from TreasuryDirect.gov.

But here’s the catch: That form must have your signature “guaranteed” by a bank. And many banks won’t notarize or guarantee the form for non-customers.

The only other option is to open a digital account at TreasuryDirect.gov. There you will create a “bond manifest” listing your savings bonds by registration, serial number and issue date. They will be converted into electronic bonds, which you can easily sell, with the proceeds sent electronically to your bank account or used to purchase new Treasury securities, such as new high-yielding Series I bonds. You will still have to mail the unsigned bonds to the Treasury along with the conversion form created at TreasuryDirect.gov.

If the bond’s owner is deceased and no co-owner is listed, the beneficiary must present proof in the form of a certified death certificate, an estate document (will or trust) and the unsigned bonds, along with Form 5336 or Form 5394. This is best done in person at a bank, but it can also be uploaded through TreasuryDirect.gov into a new digital account for the beneficiary.

If you transfer a bond, you pay taxes on all the accrued interest until the date of transfer. The person given the bond will pay taxes on earnings from that point forward. If you simply add a name to the bond ownership, it is not a taxable event.

Important: Savings bonds do not get a step up in basis at death, so the estate will owe taxes when the bonds are cashed.

Buying savings bonds is easy these days, but it pays to know the rules when it comes to cashing them in. That’s the Savage Truth.