Savings Bonds: Know When to Hold 'em, Fold 'em

Dear Dr. Don,

In April 1983 we purchased Series EE savings bonds in $100, $200, $500 and $1,000 denominations. We also own 30 Series I savings bonds issued in August 2003. Finally, we have $1,000 face-value Series EE savings bonds issued in October 2001, 2008 and 2009. Do you have any suggestions on which bonds we should redeem first?

Thanks,

-Clyde Cache

Dear Clyde,

How much money do you need? The savings bonds you bought in 1983 are maturing this year, and they're an easy choice to cash in when they mature for two reasons. First, the bonds stop earning interest when they mature. Second, the interest earnings are taxable in the year that the savings bonds mature. If you've been deferring paying income taxes on the bonds, you'll owe taxes on all the interest earnings. If you've been paying income tax on the interest earnings all along, you'll only owe income tax on this year's interest earnings. This presumes you're not cashing in savings bonds issued after 1989 to fund qualified higher education expenses.

The two most recent investments are still within five years of their purchase. If you cash in these bonds, you'll be hit with an early redemption penalty of the last three months' interest. That's the bad news. The good news is that for the 2009 savings bond, the last three months' interest doesn't amount to much. It's currently earning 0.7%. The 2008 purchase is earning 1.4%.

If you hold these bonds for 20 years, the government will adjust the yield up to approximately 3.53%. That's because the government will need to fulfill its guarantee that the Series EE bonds will double in value over 20 years. If you don't have that kind of investment horizon for these bonds, then think about redeeming them.

Your 2001 Series EE savings bond is currently only earning 0.81%. But that bond is much closer to its shorter, 17-year guarantee it will double its value, so I'd hang on to it.

Those Series I savings bonds you purchased in August 2003 are earning a fixed yield of 1.1% plus an inflation yield based on changes in the consumer price index. I'd recommend that you hold on to these bonds for the long haul.

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