Lots of investors have accumulated a stack of savings bonds in their safety deposit box over the years; often, they aren’t quite sure what to do with them. This may be the right time sit down and review your holdings. First, these bonds don’t continue to pay interest indefinitely. Second, it may also be appropriate to reconsider savings bonds as a viable investment alternative. The fixed rate on EE bonds has just been increased as of May 2011, and these bonds offer a number of other attractive features as well.
EE savings bonds now are available in two formats. The newer electronic bonds, which are held for you in an account you establish at the US Treasury, are sold at face value, not at a discount. They are available in any amount you choose, over a $25 minimum. The traditional EE bonds, which since 2011 are known as Patriot bonds, are sold at one half their face value, in denominations of 50, 75, 100, 200, 500, 1,000, 5,000 or 10,000 dollars. Both types of bonds are subject to a $5,000 maximum purchase in any calendar year. The bonds must be held for a minimum of one year; and as long as they are held for at least 5 years they can be redeemed at any time without penalty. If you redeem then before 5 years, you will forfeit the most recent three months interest.
Anyone who has a Social Security number can own a EE bond, as long as you are a U.S. resident, a civilian employee of the U.S. government, or a U.S. citizen living abroad with a U.S. address of record. They are also one of the few securities that can be owned directly by a minor. Interest you earn on EE bonds is free from both state and local taxes, and Federal tax is deferred until the bonds are cashed in, or until they stop earning interest, after 30 years.
There is also a special tax exemption for EE bonds issued after 1989 when they are used to pay for certain higher education costs. There are some restrictions on income and ownership; you can get more information about this tax exemption in IRS form 8815, on the IRS website www.irs.gov.
Interest rates on EE bonds issued after May 2005 are fixed; the current rate as of May 2011 has just been raised to 1.1%. Rates on bonds issued between May 1997 and April 2005 are adjusted every 6 months based upon 90% of the average yield on the 5 year Treasury note for the preceding 6 months. No matter what the current interest rate, the Government will guarantee that an EE bond will double in value in 20 years (its original maturity), and will make a special one-time adjustment to its value at maturity, if necessary, to make up the difference.
When you’re ready to cash in your bonds, you can find their current value with a simple calculator that is available on-line at www.treasurydirect.gov. Most local banks are able to redeem EE bonds up to a maximum of $1,000, if you are an account holder or can provide proper identification. If you need to redeem more, you’ll have to provide some additional documentation, sign the bonds at the bank, and send them in for redemption to a Treasury retail securities redemption location, which for us is the Federal Reserve Bank, Pittsburgh Branch, P.O. Box 299, Pittsburgh, PA 15230-0299. Since EE bonds do not pay accrued interest, if you are redeeming bonds that pay interest semiannually, be sure you cash in your bonds immediately after an interest payment date.
Steven Weber, Registered investment advisor, and Gigi Harris, Dir., Client Communications, are members of the Bedminster Group, a fee-only advisor providing investment and financial counsel to clients in the Low Country since 1997.