PLANNING TODAY
US Savings Bonds
Like many people, you may own a collection of United States
Savings Bonds that you have accumulated over your lifetime. Although
savings bonds are based on a simple idea, there are many rules that
govern them. Here are some tips for managing your bonds:
1. Series EE Bonds — Most savings bonds issued today are Series
EE bonds. These bonds accrue interest, meaning that you collect your
interest when you redeem the bond. Series EE bonds are purchased at
half of their face value. For example, you pay $50.00 for a $100.00
savings bond. The bond grows in value as the interest accrues.
2. Interest Rate — Currently, Series EE bonds earn interest at a rate
of 90% of the average yield for 5-year Treasury bonds. Depending on
the date of issue of your bond, it may be paying a guaranteed minimum
interest rate, a fixed interest rate or a market-based rate. Each bond will
continue to accrue interest according to the terms of its issue. When the
value of your bond reaches its face value, the interest rate calculation
may change.
3. Maturity — Series EE bonds stop earning interest after thirty years.
Some of the older Series E bonds issued before 1965 earn interest for 40
years. The point at which a savings bond stops earning interest is called
the final maturity. If you continue to hold bonds after final maturity, you
are making an interest-free loan to the federal government and earning
nothing on your investment. Savings bonds may be redeemed at most
banks and credit unions.
4. Older Savings Bonds — Check any old bonds you own to see
if they are still accruing interest. The Treasury Department offers a
user-friendly savings bond calculator on the internet. You can use it to see
what each of your savings bonds is worth today. Here is the internet address
for this calculator: http://www.publicdebt.treas.gov/sav/savcalc.htm
5. Series I Bonds — The federal government began issuing
inflationadjusted
Series I bonds in 1998. Series I bonds accrue interest at a fixed base
rate plus a semi-annual inflation adjustment. These bonds also accrue
interest for a period of thirty years before reaching final maturity.
6. Taxation — You will owe income tax on the accrued interest when you
redeem a bond, or when it reaches final maturity. For example, if you paid
$500 for a bond that you cash in for $1,200, you would owe income tax on
$700. Make sure you cash in your bonds by the final maturity date. If you
hold your bonds past final maturity, you still owe the tax once they reach
final maturity.
7. Series HH Bonds — Series E and EE bonds can be converted to Series
HH bonds, which defers the tax for an additional 20 years. HH bonds are
interest-paying bonds that distribute interest payments every six months.
Once the HH bond reaches final maturity, all of the tax on the accrued
interest from the original E or EE bonds will be due. The Treasury
Department is not issuing any new HH bonds after August 31, 2004.
8. Bond Ownership — Savings bonds can be issued to a single owner
or to two co-owners. Be careful with co-ownership, as either owner can cash
in the bond. If one co-owner dies, the other co-owner becomes the sole
owner. If you transfer your bond to a new owner, the tax on the accrued
interest up to that point is due. You may also name a beneficiary to inherit
your bond. Your beneficiary will be responsible for paying the tax when the
bond is redeemed.
9. Keeping Track of Your Bonds — The Treasury Department website
provides a free “Savings Bond Wizard” software program that you can
download to your home computer to manage your portfolio of bonds. Here
is the website: http://www.publicdebt.treas.gov/sav/savwizar.htm
10. Gifts for Charity — You may use savings bonds to fund a gift to the
American Air Museum in Britain or other charity. They are best given as an
estate gift in your Will. Current IRS rules prohibit naming a charity as a
beneficiary or co-owner on US savings bonds during lifetime.
When you leave savings bonds to a charity in your Will or
Revocable Living Trust, the income tax on the accrued interest is
avoided, so the full amount goes to the Museum or other charity. Make sure
you work with a lawyer, so that your bequest is drafted properly.
US Savings Bonds, retirement funds (such as IRAs or 401k plans), and a
variety of other funds that the IRS considers to be earned prior to death, but
paid out after death may generate income taxes on your estate in addition to
any estate taxes that might be due. If you are considering any charitable gifts
in your estate plans, you should consider including the wording below in
your Will or trust. Without this wording, even charitable gifts of these assets
through your Will or trust will mean that the IRS may well require additional
income taxes that can easily be avoided.
“I instruct that all charitable gifts, bequests and devises should be made,
to the extent possible, from assets that constitute Income in Respect of a
Decedent (IRD), as that term is defined in the Internal Revenue Code.”
If there are no charitable gifts, no harm is done. If there are, this could
mean significant income tax savings. For more information, contact the
American Air Museum in Britain Legacy Office.
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