I own about $2,000 in Series EE Savings Bonds dating from the 1980s and '90s. I'm thinking about cashing these in and investing the proceeds in a Roth IRA. Is this a good idea? Either way, I am earmarking this money for retirement.
D.S., via e-mail
Are you looking for a better total return than the bonds provide? Perhaps you think now is the right time to shift from US government bonds into an equity-based global mutual fund or an exchange traded fund. If these notions are driving your desire to change, then Mr. Scott thinks a switch makes a lot of sense.
On the other hand, you may be quite pleased with the current returns from the bonds. Perhaps the thought of investing your proceeds into an asset class, like equities, with a potential for higher returns along with certainly higher volatility, makes you queasy. Do you plan to reinvest the bond proceeds into a CD or other fixed income investment? If your answer is "yes," then making the switch is somewhat less compelling, though it may still make sense.
Since you pay no taxes on Savings Bond earnings until you redeem them, this investment already has a built-in tax-deferral feature. When the bonds are redeemed, you'll owe federal income tax on all previously earned interest.
Paying the tax sooner rather than later is not all bad, says Mr. Ford. That's especially the case when you consider the benefits of investing inside a Roth IRA. The unique feature of a Roth is that qualified withdrawals are completely tax-free.
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