(updated 5/11 with answers to your questions about purchasing savings bonds.)
The interest in savings bonds has never been higher. That’s because in an era of low CD rates, I-bond rates are astounding!
From May 1 through November 1st the Series I-bond interest rate is 9.62%! That rate will be paid on all outstanding I-bonds for the next 6 months. It is adjusted twice a year to reflect inflation.
The only place to buy savings bonds now is through the online government website – www.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 5 years, you’ll lose the last 3 months of earned interest.
There is a $10,000 per person per year limitation 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 the request must be made at the time you file your taxes.
Below are answers to some frequent questions:
Yes, you can gift Series I savings bonds to children. But a parent must create a “minor-linked account” for the purchase. Then you, as grandparent or family friend, can buy bonds in that account. The maximum allowed in the account is still $10,000 per year in this account — just in case I’m talking to some very generous grandparents!
Many couples have asked whether they can buy bonds jointly, or separately using the same linked checking account. Here is the response from Treasury:
“You and your spouse are each permitted to open a TreasuryDirect account. If you choose to include your wife on bonds you purchase, it is commonly referred to as a “with” registration. You would be the primary owner and your wife would be the secondary owner. For example, “John Doe WITH Jane Doe”. The primary owner is named first and has the right to transact the bond. Upon the death of either the primary or secondary owner, the survivor will be considered the sole owner of the bond. The other options would be sole owner or beneficiary registration. Therefore you would have one $10,000 registered as Husband with Wife and another $10,000 registered as Wife with Husband.
The same checking/savings account can be used to purchase bonds in both TreasuryDirect accounts.”
If you have a Revocable Living Trust, here’s how to title the account in the name of the trust, according to the Treasury Department.
“The trust documents are not needed at the time the account is created. However, the registration must include the date the document was executed, the name of a trustee of the trust who is authorized to act alone on behalf of the trust with regard to the account, and any information that is necessary to distinguish the trust from any other trust, including the name of the grantor(s). For example, “John Doe, Trustee under Declaration of Trust dated January 1, 2001”
In the event the registration on a TreasuryDirect trust account is incorrect and we become aware of it, we will request the trust document to correct the registration.”
Many have asked if they could purchase I-bonds in a IRA. The answer is “no.” The Treasury Department does not act as a “custodian” for retirement accounts, so you can’t buy them in either a traditional or Roth IRA.
Old Savings Bonds
But with all the attention to 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 www.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 advisor before redeeming bonds.
How to Redeem Savings 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 FS1522, which can be downloaded from the TreasuryDirect.gov website.
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 send 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 in TreasuryDirect.
Bonds with Beneficiaries. If the owner is deceased, and no co-owner is listed on the bond, 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 can also be uploaded through TreasuryDirect 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. And that’s the Savage Truth.