A tax bill on Savings Bond interest is inevitable

Q: I bought some Series E Savings Bonds in the early 1980s. If I cash them in now, the interest will be added to my income and the tax owed is high. If I cash them and put the money into municipal bonds, can I avoid the tax?
D.L., via e-mail

A: Unfortunately, you need to pay the tax on bonds when you redeem them, says William Z. Suplee, a certified financial planner in Paoli, Pa.

With the exception of certain higher education expenses, it doesn't matter to the government why you're taking the money, he says. What matters is that whenever you do, you need to pay the taxes.

In addition, you should check your E bonds to see if they are nearing final maturity, Mr Suplee says. The government doesn't pay interest on its debt instruments forever.

Q: I am 62 and a retired public school teacher in Massachusetts. Having worked a second job all my 35 years of teaching, I am now thinking about collecting Social Security benefits in addition to my teacher pension. I now work part-time, earning $20,000 per year. Am I allowed to collect benefits from Social Security in addition to my full teacher pension? And does my part-time job influence my Social Security in any way?
F.C., Marlborough, Mass.

A: Yes, you can collect Social Security benefits at a reduced amount in addition to your teacher's pension, says William Montgomery, a certified financial planner in Phoenixville, Pa.

The answer to your second question is a little lengthier. It depends on whether you paid FICA taxes during your career, which Mr. Montgomery assumes to be the case (most of us can't escape FICA).

If so, there is a limit on a person's income. In your case, in 2006 you'll be limited to $12,400 a year. If you earn $20,000, you will lose $1 for every $2 you earn above $12,400. That means Social Security will take back $3,800 of your benefit. In simpler terms, it means that if you earn $20,000, you will effectively be working for $16,200 because of this giveback rule.

Montgomery says that another question that is often addressed, but wasn't part of your letter, is whether a person should even take Social Security at age 62 instead of waiting until age 65. Since you were born in 1943, you will not receive full retirement benefits until age 65 and 10 months.

It is often to a person's advantage to take Social Security benefits at age 62 instead of waiting until later to collect a higher amount. For example, if your Social Security benefit was $1,300 a month at 62 that means you would receive more than $46,000 between the ages of 62 and 65. If you waited until 65 to receive a higher amount, it would take about 12 years to catch up to the $46,000 you received for the three years between 62 and 65, Montgomery says.

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