I received a Series EE savings bond in the amount of $50 from my grandma when I was 2 years old (in 1990). How and when can I redeem it?
A savings bond is a type of investment, issued by the federal government, that offers a fixed rate of interest over a fixed period of time. Because they are endorsed by the government, they are considered a “safer” investment option. Like other bonds, they are often referred to as “fixed-income securities” because they pay a fixed amount of cash interest.
There are two types of savings bonds: Series I bonds and Series EE bonds. Series EE bonds are cheap (you can spend as little as $25), you’ll never lose the principal on the bond, and the interest rate is exempt from state and local income tax. The fixed interest rate can be a good thing, but if interest rates rise, you won’t be able to reap the benefits. You will also pay a penalty if you redeem your bond before maturity.
Series I bonds are like Series EE bonds in that you will also never lose your principal, they are cheap, they are exempt from state and local income tax, and you will pay a penalty if you redeem them prematurely. However, unlike a Series EE bond, the interest rate on a Series I bond is adjusted every six months.
In this case, your Series EE Bond will mature 30 years from when it was initially issued. “An EE Bond issued in 1990 is currently earning a minimum rate of around 4%, which, in today’s interest rate environment, is a very good rate for an essentially liquid investment which is backed by the US government,” said Bonnie Kirchner, a certified financial planner and author of Who Can You Trust With Your Money?, Get the Help You Need Now And Avoid Dishonest Investors.
“Keep in mind, federal taxes will be due on the accrued interest upon redemption. The interest is exempt from state and local taxes. The interest may be excluded from federal taxes in the event the bond owner pays expenses for higher education to an eligible institution and meets certain other criteria,” she said.
Kirchner said that reasons to redeem your bond would include a need for cash, the bond has reached maturity, and/or the investment is long term and you could potentially get a greater rate of return with other investments. In your case, it hasn’t yet reached maturity, so remember there may be a penalty when you sell, on top of whatever federal tax you will pay on the interest accrued. That may make you think twice about selling now, if you have other sources of cash to draw from.
Because they are considered “safe,” bonds can be a great investment choice if you are risk-averse. “In terms of financial risk, U.S. savings bonds are considered the safest investment available,” said Paul Mladjenovic, CFP and author. “This is especially important given the problems with debt instruments (bonds and mortgages) in today's shaky and over-indebted economy.”
But be sure to differentiate between savings bonds like you have and other fixed-income instruments you may be offered. While bonds are typically a good investment idea, you need to be well-informed about the performance and risk of certain bonds.
“There are almost just as many different types of bonds as there are stocks,” said Jeff Rose, CFP and author of the blog www.goodfinancialcents.com. “High-yield or junk bonds, for example, are more risky of a bond compared to Series EE bonds. It's important to know what type of bonds you are buying.”
When you know what kind of bonds will be best for you, they can be a great way to break into the world of investing.
“I like both EE & I bonds especially for those with limited funds,” said Mladjenovic. “I think that they are a great part of a diversified portfolio, especially for small investors. I include the I bond in this point because the I bond's interest rate is indexed to the government's CPI (consumer price index) rate. If the CPI rises, so will the interest rate on I bonds. This makes the I bond a good consideration along with the EE bond.”
Despite having a reputation of being safer than other investments and the fact that they are endorsed by Uncle Sam, savings bonds are not completely without risk.
“EE Bonds are subject to what are called “inflation risk” and “opportunity risk,” said Kirchner. “Inflation risk is the possibility that the value of your investment will decrease because inflation reduces the investment’s purchasing power over time. Opportunity risk is possibility of missing out on larger rewards due to committing resources elsewhere.”
To check the status of your bond’s maturity or to redeem the bond if you purchased it electronically, you can go to www.treasurydirect.gov or www.savingsbonds.gov. You can also use a calculator on these sites to figure out the interest your bond has accrued over the years in addition to explanations of how interest is determined based on the year it was issued. If you did not purchase your bond electronically, (and chances are, your grandmother didn’t), you can take the bond to a bank, credit union, or brokerage firm to redeem it.
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