Making the Most of Patriot Bonds

Dear Dr. Don,
My children each received a $500 Patriot Bond in April 2003 from an aunt. I am not familiar with the process of a savings bond and how it matures. It is a Series EE. Could you tell me if the value can go over $500, or does it max out? Any information would be helpful. How can they make the most on these bonds?
-- JoAnna Jump-start

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Dear JoAnna,
A Patriot Bond is a physical (paper) Series EE savings bond inscribed with the term "Patriot Bond" and purchased at a financial institution. Physical bonds have a face value twice the price paid when they were issued. A $500 bond was purchased for $250 in 2003. As the savings bond earns interest it grows in value. Series EE savings bonds are guaranteed by the U.S. government to be worth their face value when they have been held for 20 years.

Series EE savings bonds purchased between May 1995 and May 2003 have an original term, or maturity, of 17 years, and an extended term out to 30 years. That means that your children's savings bonds will stop earning interest after 30 years. The value of a savings bond can exceed the face value of the bond. It doesn't stop earning interest when it reaches its face value.

The TreasuryDirect Web page, "EE Bonds Issued May 1995 through April 2005," will give you all the particulars on your children's bonds, but I'd also suggest downloading the Savings Bond Wizard. It will tell you what the bonds are currently worth, the average yield earned to date and the current yield earned on the bonds. Your children's bonds are currently yielding 2.16% and have earned a yield of 3.13% since they were issued. The bonds are currently worth $319.60.

The interest income earned on savings bonds can be deferred until the bond is redeemed or matures, but savings bond owners also have the ability to pay taxes on the interest income in the year earned. You didn't tell me how old your children are, but it may make sense to switch to annual reporting of the interest income versus deferring the taxes. The TreasuryDirect Web pages, "Series EE/E Savings Bonds Tax Considerations" and "Education Planning" (see the "Another Education Savings Option" section) explain this option.

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Filing annual tax returns may be more bother than it is worth to pursue this option if you're just considering the interest income of these two bonds, but you asked how they might make the most of these bonds.

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