Savings Bonds: What You Need to Know
Life + Money

Savings Bonds: What You Need to Know

Understand the nitty gritty of buying, owning, redeeming, gifting and bequeathing savings bonds. Plus, tax tips

An individual can invest up to $5,000 in a calendar year in each series (EE and I) and in each format (paper and electronic). That’s a total of $20,000 or $40,000 for two co-owners. Paper savings bonds bought as gifts aren’t included in your annual limit.

Bonds earn interest from the issue date, which is always the first day of the month you bought. If you buy a bond on the last day of the month, it will be backdated to the first day. Interest on new bonds is credited every month. Interest on older EE bonds—those bought prior to May 1, 1997—is normally credited every six months. You earn more money by cashing them just after the crediting date rather than just before. You can find that date at TreasuryDirect.

To find out what your bonds are worth today, go to the pages for EE or I bonds at TreasuryDirect. Click on Redeem and look for the Savings Bond Calculator.

You can redeem just part of a bond if its face value is at least $50 for Series E bonds, $75 for Series EE or Series I, and $1,000 for Series H or HH. For example, a bond worth $1,000, with an accrued value of $700, can be turned in for $700 in cash and $300 in bonds. The new bonds will have the same issue date as the old one did.

If you buy a savings bond in your own name, you control it completely. If you name a beneficiary on an EE bond, you can change the beneficiary when¬ever you want just by filling in Form PD 4000 (available at TreasuryDirect or from many of the agents who issue savings bonds). The rules are different for the older, Series E bonds. With them, the beneficiary has to agree to being removed by signing Form PD 4000.

If you buy a savings bond in joint names, both owners have to agree to any changes. But either one of you can cash in the bond and the other doesn’t have to know. Whoever holds it, controls it.

The person whose money bought the bond is called the principal co-owner, and all the income should be taxed to him or her. If both of you contributed, there is no principal co-owner and taxes should be allocated accord¬ing to what percentage each of you paid. As a practical matter, however, the tax is usually paid by the person who redeems the bond.

If you buy a paper bond as a gift, you don’t need the recipient’s Social Security number; you can use your own. Gifting is more complicated, how¬ever, through TreasuryDirect.

If the bond is a gift, the interest is taxed to the person receiving it. In theory, the purchaser should sometimes pay the tax. For example, the inter¬est is taxable to you if you buy a bond as a gift for a child and name yourself co-owner. Nevertheless, if the child grows up and redeems the bond, the 1099 will be issued in the child’s name.

The interest earned on savings bonds is normally tax deferred. But chil¬dren who own bonds and are in low (or zero) brackets should not defer. Report the interest now, when little or no tax will be due, rather than wait until the child grows up. To get this easy tax break on bonds bought this year, file a return for the child showing how much the EE bonds gained in value (your bank or credit union may have this information; you can also use the Savings Bond Calculator at TreasuryDirect). No further tax returns have to be filed for those particular bonds as long as the child owes no tax. In any year the child does owe a tax, his or her return will have to report that year’s gain in the EE bonds’ value.

What if your child deferred income taxes in the past and now wants to pay them currently? In the year that you switch, all past gains must be reported.

What if the child has been paying taxes currently and now wants to defer (deferral is smart for children who have enough unearned income to be taxed in their parents’ bracket? File Form 3115, Application for Change in Accounting Method, with the child’s tax return for the year you want the change to start.

Keep copies of all the child’s tax returns. When the bonds are cashed in, you or your child must be prepared to prove which gains were previously reported. Otherwise the IRS might conclude that the child owes taxes on all of the profits.

Bonds may be held by the trustee of your trust. But the trust can’t be co-owner or beneficiary.

What if you die holding savings bonds? Your executor or trustee has two tax choices:

1. All the income to date can be reported on your final tax return and the taxes paid. The beneficiary who receives the bonds should then be taxed only on the income earned from that point on. To avoid being taxed on the full amount at redemption, however, the beneficiary must have a copy of the tax return to prove how much was previously paid.

2. The bonds can be passed to the beneficiary as is, with all the tax deferred. When the beneficiary redeems, he or she pays the entire tax.

When one owner dies, a co-owner takes over the bonds automatically. But they should be reissued in the surviving owner’s name (or in the name of the surviving owner—named first—plus a new co-owner). If you inherit a sav¬ings bond that was issued to someone else, you can also have it reissued in your name or in your name plus a co-owner.

On reissue, the bond’s final maturity remains the same, interest accumu¬lates as usual, and no taxes are due. However, you can’t have a bond reissued if it’s close to its final maturity. Such bonds must be redeemed.

To redeem a bond after a death, or have it reissued in a new name, a benefi-ciary has to produce a death certificate. A co-owner can redeem without a death certificate but will need it for reissue.

If you inherit a bond and die without having the former owner’s name removed, your heirs will have to produce two death certificates—yours and the former owner’s—before they can redeem the bonds.

Co-owners can redeem their bonds at any bank that handles that business. If you inherited someone else’s bond, however, you have to redeem through a Federal Reserve Bank or the Bureau of the Public Debt.

If you die without a will, your family will have to suffer a mess of paper¬work (Form PD 5336) before your savings bonds can be passed to a new owner. So don’t.

If you co-own bonds that cannot be found after the other owner’s death, file a lost-bond claim with the Bureau of the Public Debt and have them reissued. You may discover that the other owner cashed them without tell¬ing you.

For a reissue form (PD 4000), ask a bank that handles savings bond sales, call the nearest regional Federal Reserve bank, or go online to Treasury-Direct. The forms are fairly simple. If you have a question, call the nearest Fed. Your bank might also help you—sometimes free, sometimes for a fee.

What if you want to give away a savings bond? Don’t have it reissued in the new name. If you do, you’ll owe income taxes currently on the accumulated interest even though that interest won’t actually be paid out. Years later, when the recipient redeems the bond, all the interest will be taxable unless he or she can prove that part of the tax was already paid. These rules also apply if you’re the bond’s principal co-owner (listed first on the bond’s face) and want to reissue it solely in the name of the other owner.

The best way of making the gift is to add the lucky person to the bond as co-owner. There are no tax consequences. The co-owner can cash in the bond whenever he or she wants, deferring taxes until that time. There’s also no tax if you remove the second co-owner’s name or have the bond reissued in the name of the trustee of your trust.

What if you marry and change your name? You don’t have to get your sav-ings bonds reissued. When you cash them in, just sign the bond with both your maiden name and your married name.

What if you buy a bond and it comes with your name spelled wrong or the wrong date on it? Don’t fix it yourself. You cannot redeem a bond that has been altered. Return it to the place that issued it and get the error fixed.

You’re not allowed to borrow against your savings bonds.

If you lose a bond, it’s easy to replace as long as you know its face value (denomination), issue date, registration number, and the name or names in which it was issued, their addresses, and their Social Security numbers. Photo¬copy each bond you own or list the critical information. Keep these records in your safe-deposit box or fireproof home safe.

If you don’t keep good records, the Treasury may be able to trace the bond for you, especially if it was issued after January 1974. All those sav¬ings bonds have Social Security numbers on them. What’s lost can be found if the Treasury knows the Social Security number of the first owner named on the bond.

Older bonds sometimes carry Social Security numbers too. If not, the Trea¬sury can’t hope to trace ownership unless it knows the bond’s serial number or the name on the bond and that person’s address when it was bought.

A lost bond can be replaced at no cost to you. If you’re replacing a partly burned or mutilated bond, send the Bureau of the Public Debt the remains. The form used for replacement is PD 1048, available online or from many com¬mercial banks, a regional Federal Reserve bank , or the Bureau of the Public Debt. Replacement takes anywhere from 8 to 24 weeks.

If you replace a bond and the original turns up, it must be surrendered for cancellation. The government won’t let you cash the same bond twice. If you try, you’ll find out that Big Brother knows.

If you’re in a payroll deduction plan, you can buy fractions of bonds. For example, you might have $25 taken from every paycheck and credited toward the $50 cost of a $100 bond. After two payments you should be issued your bond. Arrange to have the bonds mailed to you and check that the amounts are right. Your only proof of purchase is normally the deduction shown on your pay stub, and it’s up to you to check that you received what you paid for. To simplify the job, buy a full bond with each deduction rather than a fraction of a bond. If your bonds don’t arrive or you get the wrong denominations, query your payroll department, which should initiate a claims procedure.

Any bank authorized to sell EE bonds can also cash them in for you, although some redemptions, such as those by a guardian or trustee, may have to be handled directly by the government. Try to redeem at a place where you’re known, such as your own bank. If you’re not known, you will need documentary identification—a picture driver’s license, an employee card with your picture on it—and may be limited to redeeming only $1,000 worth of bonds per day.

Your accumulated bond interest becomes taxable when you cash in the bonds. So if possible, don’t redeem them in a high-earning, preretirement year. Wait until well after you retire, when your income may have dropped.

A tip on older savings bonds, bought prior to May 1, 1995: these bonds have interest rate guarantees ranging from 2.5 to 4 percent. Don’t cash in an older bond without ascertaining its guarantee. It may be earning more than any other fixed-income investment you own. To check the guarantee, consult TreasuryDirect’s online “Table of Guaranteed Minimum Rates and Original Maturity Periods.”

Where to Get Information on Savings Bonds

You can’t rely on banks to answer your questions on savings bonds correctly, even if they handle them. The program is complex and the clerks may not be fully trained. You should go online to TreasuryDirect or get information bro¬chures to research the bonds yourself. The Bureau of the Public Debt answers questions, handles problems, and mails out forms. You can order forms online or write to the Bureau’s Division of Customer Assistance at P.O. Box 7012, Parkersburg, WV 26106. For a question about paper savings bonds, call the Savings Bond Processing Site. There are two numbers: 800-245-2804 and 800-553-2663.

If you don’t want to dig through all the numbers yourself, you can buy a per-sonal savings bond report from ( It tells you about each bond you own—interest rate, current value, maturity date, and so on. If you’re cashing bonds in, it will advise you on which ones to redeem first (those paying lower interest rates) and when to redeem them, to capture the final six-month interest payment. The Web site also contains plenty of free information.

You can get a similar report from the Savings Bond Informer at P.O. Box 11721, Monroe, MI 48161, or call 800-927-1901. If you want to look before you buy, the Informer will send you a free example.

I also recommend the Informer’s valuable reference book on how the bond program works, U.S. Savings Bonds. It was published in 1999 but comes with an update on all the latest changes, strategies, and interest rates. Cost: $19.95.

From MAKING THE MOST OF YOUR MONEY NOW by Jane Bryant Quinn. Copyright © 1991, 1997, 2009 by Berrybrook Publishing, Inc. Reprinted by permission of Simon & Schuster, Inc.