You might be wise to redeem low-yield Savings Bonds

Literally billions of dollars are currently drawing the puny interest of 6 1/ 2 percent in Series E Savings Bonds. There are some advantages in these US government savings bonds. The owners can save on taxes, since the tax on interest is deferred until the bonds are cashed, which could be when the owner is retired and in a lower tax bracket. And since E-bonds are direct obligations of the US Treasury, there is no risk of not getting your money back.

However, in today's high-interest environment, the small interest earned by E-bonds or the new EE-bonds opens a question about their worth as continuing investments.

At this point I believe that owners of matured E-bonds should cash out their bonds during a month immediately after the redemption value has increased and invest the cash to produce income closer to the current inflation rate of around 15 percent.

If your E-bonds are close to maturity, that is, within one year, you might prefer to wait until the month they mature, as higher interest is paid during the last year. E-bonds only one or two years old are drawing even less than the average 6 1/2 percent. You might prefer to cash these E-bonds early and invest the cash in something earning a higher return.

The timing of redeeming your E-bonds is important. Otherwise, you could lose up to five months' interest. While banks will usually have a table of redemption values, you can gain little information for planning future redemptions of numerous bonds. To get your own copy of "Table of Redemption Values," write for Booklet PD-3600 to: The Commissioner, Bureau of the Public Debt, Department of the Treasury, 1435 G Street, NW, Washington, DC 20226. It's free.

Individual E-bonds increase in redemption value at least every six months -- more often for some recently issued ones. If you plan to cash in your E-bonds, do so as soon as each bond jumps to a higher redemption value.

Tax implications of E- and H-bonds could affect your planning. You will have to pay taxes on all interest payable at the time an E-bond is cashed, unless you have declared the interest each year. (Minors and others with little or no income can own E-bonds and declare the interest yearly and realize a tax saving.)

All E-bond interest is taxed at ordinary income rates, even though the bond may have been owned for more than one year. None of the interest payable on E-bonds is subject to state or local taxes.

When E-bonds are exchanged for HH-bonds (formerly H-bonds), the accrued interest on the E-bonds is not subject to tax at the time of the exchange. HH-bonds are issued in denominations of from $500 to $10,000, and interest is paid on them twice yearly.That interest is taxable on federal income tax returns as ordinary income. Interest on HH-bonds is not subject to state or local taxes.

I have long advocated the purchase and retention of E-bonds for their unique tax benefits (noted above). Interest rates have expanded beyond the limited rates afforded on E-, EE-, H-, and HH-bonds, however. This recommendation to redeem E-bonds and invest funds elsewhere is made reluctantly. I hope that inflation will cool and interest rates decline to moderate levels that will again make US Savings Bonds an attractive investment.

of 5 stories this month > Get unlimited stories
You've read 5 of 5 free stories

Only $1 for your first month.

Get unlimited Monitor journalism.