Saving Yourself a Savings Bond Headache

This week, Gail lets you know how to tell if your Savings Bonds have matured... and what to do about them.

Dear Gail —

We recently moved my mom into a nursing home. In the process of cleaning out her house, we discovered an envelope full of Savings Bonds! There are probably 50 of them — all “Series E” or “EE.” Most date back to the 1950s and 1960s, with a few purchased in the mid-1970s.

I assume most of these bonds have already matured. Should she just cash them all in? What about taxes?



Dear Margie —

The government has been looking for your mom! And probably about a million others just like her: folks who bought U.S. Savings Bonds way back when and totally forgot about them. In fact, the Treasury Department has $13.3 billion dollars worth of Savings Bonds on its books that have matured and are no longer earning interest.

According to Pete Hollenbach, a spokesperson for the Bureau of Public Debt (the agency inside the Treasury Department that oversees Savings Bonds), there’s a staff of ten people dedicated to tracking down the owners of these bonds and cashing them out.

Shocked? Me, too.

Frankly, I figured the government would be happy to use this money interest-free. After all, there are rumors that the folks in Washington are having a little problem making ends meet lately.

“It doesn’t make any sense to have an asset that’s not earning any return,” says Hollenbach. “We’d rather have people put that money to work.”

According to Hollenbach, the government would like to close out its books on these bonds and has been making an effort to get people to collect their cash for the past 10 years.

One of the things people like about Savings Bonds is the fact that they’re easy to invest in: all you do is go to your local bank, plop down increments of $25 bucks, wait 30 or 40 years (there haven’t been 40-year bonds issued since December 1965), and collect about twice as much money as you invested. Best of all, they’re backed by the safest debt issuer in the world: Uncle Sam.

What those cheerful bank tellers don’t tell you about Savings Bonds (they don’t work for the federal government so why should they know this?) is that figuring out what they’re worth and knowing when to cash them in can be tricky.

Make that [used] to be tricky. Without a whole lot of people noticing, Savings Bonds have become much more user-friendly.

There’s a wealth of information on the government website: You can download the free “Savings Bond Wizard,” a data base that helps you keep track of the Savings Bonds you own. You enter in some basic information such as the amount you invested, type of bond, and its serial number and the program will tell you what it’s worth today, when it reaches full maturity, and more.

If all you’re looking for is what a bond is worth, click on the “Savings Bond Calculator.” Indicate which type of bond you have (E, EE, or I), plus the month and year it was purchased. You’ll see in an instant what you’d get if you cashed it in today.

You can also purchase Savings Bonds over the Internet at the same website.

(By the way, with older bonds timing was everything. If you cashed them in a day early, you lost the last six months’ worth of interest. That’s not the case with newer bonds. Those issued since 1995 accrue interest on a monthly basis. So the most you’ll lose is the amount credited to your bond in the past month.)

If you’ve misplaced or lost a Savings Bond, all you have to do is file a claim with as much information as you have and the Bureau of Public Debt will research your bond. Hollenbach says, “If it’s matured, we won’t send you another certificate, we’ll send you the money.”

Wow. Isn’t that sensible! Pinch me. I can’t believe I’m using concepts like “reasonable” and “federal government” in the same breath.

The Bureau of Public Debt may be refreshingly practical, but the Internal Revenue Service — at least officially — takes a tougher position about when you have to report and pay income tax on Savings Bond interest. (You pay no state tax on Savings Bond interest.)

As you know, you don’t actually receive the interest from Savings Bonds when it is earned. Instead, interest “accrues,” or builds up, adding to the value of the bond when you cash it in.

According to a spokesperson for the Internal Revenue Service, by law, you are required to report and pay tax on the interest earned on a Savings Bond either in the year it matures or on an annual basis. The only exception to this is when the proceeds are rolled into Series H or HH Savings Bonds, which extends your tax deferral.

Read the above paragraph again. You have to report and pay tax on the interest earned by Savings Bonds either in the year they mature or on an annual basis. Notice that this has nothing to do with when you cash the bonds in!

The government doesn’t really care that you “forgot” they were in that shoebox in the guest closet. The regulations are crystal clear: Under the law, interest on a U.S. Savings Bond becomes taxable when it matures (assuming you haven’t been paying the tax each year.) The I.R.S. assumes you keep track of when your Savings Bonds mature and that you redeem them at that time.

In the real world, however, that is clearly not how millions of Americans manage their Savings Bonds.

If you’re wondering whether any of your bonds have matured, it’s very simple. Dig them out and check the purchase date. Every bond issued from May 1941 through November 1965 (Series “E”) earns interest for 40 years. Since December 1965, Savings Bonds mature in 30 years.

In other words, if you have a bond that was issued in June 1965 or earlier, all I can say is, CASH IT IN! It is no longer earning interest.

What if you find you’re holding a bunch of bonds that matured years ago?

Here’s the “official” position of the Internal Revenue Service: “Typically, if you’re looking at someone’s stack of bonds, there are probably going to be different maturities. You need to file an amended tax return for every year, no matter how long ago.” (Keep in mind the I.R.S is only following the regulations Congress wrote.)

Say you own Series E bonds issued in 1964. These reached maturity (a/k/a stopped earning interest) last year. So technically you’re supposed to file an amended 2004 return. It’s certainly a pain in the neck, but there’s a good chance last year’s tax return is still lying around the house.

However, this gets difficult when you’re dealing with bonds that reached maturity years ago. For instance, Margie, those bonds your mom purchased during the fifties matured in the 1990s. “All” you have to do is dig out your mom’s tax returns (doesn’t everyone save a copy of every single return they’ve ever submitted?) and file amended returns for the years affected.

Now here’s what happens if you follow the above “Good Citizen” script.

If additional tax should have been paid in previous years as a result of Savings Bonds maturing, you’ll owe that amount of tax plus interest. (There’s irony for you: the government’s been using your money interest-free for years and now you’ve essentially got to pay interest to the government because you didn’t take it back sooner!) There could also be penalties.

Don’t panic. Clearly, the Treasury Department isn’t going to start hauling grandpa off to the federal clink because he failed to timely report $51.52 worth of Savings Bond interest. Think of the pictures on the evening news!

Besides, the government likes it when people loan it money by participating in the Savings Bond program.

My sources tell me there’s another, simpler way to handle this: Report the interest the year you cash the bonds in, regardless when they matured.

Here’s a little secret: the government has no way to connect your Social Security number to the bonds you cash in. At least not when you’re talking about older bonds.

When you redeem Savings Bonds, the bank — not the federal government — issues you a 1099 Form that lists the interest you were paid as if it were received in the current year.

Keep in mind, this is not — NOT! — official I.R.S. tax advice. But it works for everyone involved. It’s practical. And it frees up untold numbers of I.R.S. agents, who can better spend their time going after the really bad tax dodgers out there.

By the way, over the years, Hollenbach says the Savings Bond sleuth squad has located the owners of about two-thirds of the bonds that are no longer earning interest. That’s a pretty amazing feat, considering the address information is 30 or 40 years old, there’s no Social Security number attached to a bond, and every single one has to be looked up on microfiche! (If you know what that is you’re at least as old as a mature Series E bond.)

Guess what? Most of the folks notified about their mature bonds have possession of them. In other words, the reason the bonds haven’t been redeemed is not because they are lost.

About 20% of the people contacted don’t realize their bonds have stopped earning interest.

But, believe it or not, Hollenbach says more than half of the bond owners they’ve contacted say they don’t want to cash them, in even though they’ve stopped earning interest.

Reasons vary from “I don’t need the money” to “I don’t want to pay the tax.” (Those folks obviously don’t realize they owe the tax whether they redeem their bonds or not.)

So there you have it:

Play it by the books, or take the practical approach. But I see no reason to continue to let the government use your money for free. Even a measily money market account will give you a better return.

Besides, it breaks my heart to think of those poor folks at the Bureau of Public Debt bent over microfiche readers. Give ‘em a break — cash in your mature Savings Bonds, OK?!

Hope this helps,


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