Cashing in those savings bonds could cost you.

Peter D. Recchia, CPA, AIF

July 12, 2017

Saving up savings bonds? Not sure whether to cash them in or not? Take a moment before making that decision because your financial circumstances could either help or hurt you.

Initially created to fund U.S. military efforts in WWII, savings bonds have been a safe and secure investment for decades. And while they’re not necessarily a wise investment these days (paying as little as one percent interest), many people still have a stash of old bonds.

First, take a look at your bonds.

Without getting into specific series, many bonds mature at 30 years from date of purchase. So the first step is to take a look at what you have by going to Treasury Direct and clicking on the savings bond calculator. There, you can enter your bond number, face value, and date of purchase to determine what it’s worth and if it’s still paying interest. 

To that point, we recommend opening an account at Treasury Direct, an online tool offered by the U.S. Department of the Treasury Bureau of the Fiscal Service. You send all of your bonds via certified mail, and they hold them online where you can easily check value, cash in, add a beneficiary, or assign co-ownership.

Next, consider your circumstances.

When you cash in those bonds, the interest earned is considered income affecting three major areas of concern.

  1. Income taxes. If you bought a bond for $25 with a maturity value of $150, you’ll pay interest on the $125 income. That’s always been a given, but you should consider not only which tax bracket you’re in, but also where you fall within your bracket each year. If you fall at the high end, you may want to either cash in smaller amounts per year (that keep you within your bracket) or assign a co-owner of the bond who will incur the income tax upon cashing (whoever cashes in the bond is the one who will pay taxes on the interest).
  2. Medicare premiums. Just like with income taxes, the higher your income, the higher your Medicare premium. A significant increase in interest income could triple your premium, so spread those earnings over a number of years.
  3. Property taxes. Many counties in Illinois have implemented a “senior freeze” on property taxes if your income is below a certain amount. That could change drastically if the interest earned from bonds throws you into the higher category.

When cashing in might be a good idea.

  1. The five-year look-back. If there’s a potential future need to go into a nursing home, Medicaid may seize assets earned during the previous five years. You might want to go ahead and cash in bonds in order to start that five-year clock ticking now.
  2. Who’s in the lower tax bracket? Let’s say your adult children are at the prime of their earning potential and, therefore, in a higher bracket than you. Don’t wait to cash in mature bonds — you’ll pay less in taxes than they would in the event of your death.
  3. College tuition. In certain circumstances, interest earned that’s used to pay college tuition is tax-free.

Talk to your tax or financial advisor.

To cash or not to cash? Before you reach a conclusion, there are a number of factors to consider: the types of bonds, your specific financial circumstances, and the exact tax ramifications. We’re here to help make the decision process a little easier. Contact us at 4Wealth with any questions or concerns you may have.


About Peter: I am president and Founder of 4Wealth® Financial Group, a CPA and Accredited Investment Fiduciary (AIF), and have over 25 years of experience. I take pride in developing custom solutions for every client, whether it involves tax planning, creating large or small pension programs, or simply offering sage advice that is always in my client’s best interest. I can be found on LinkedInTwitter, Facebook, and at (708) 695-5300. | A freelance writer assisted in the preparation of this article.

   

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