Currently over 50 million savings bond investors own nearly $178 billion worth of savings bonds. For decades, Uncle Sam did a great job marketing and selling the investment. However once owned, many investors stuffed the bonds in shoeboxes, drawers, under the bed, or in safety deposit boxes. The bonds were often earmarked for education, retirement or stored away for rainy day purposes.
There are approximately 637 million paper savings bonds still in circulation. Most of these bond owners still don’t properly track or manage their investment. A lot of misunderstandings, mystery and myths surrounding how the investment actually works.
SavingsBonds.com has identified the Top 5 Savings Bond Myths that every bond owner should know:
Myth #1. When a savings bond reaches its face value – the amount printed on the front of the paper bond - it will stop earning any additional interest.
Fact: Series EE paper bonds will continue to earn interest AFTER it has reached face value, for up to 30 years or until it is redeemed - whichever occurs first. The good news is bonds are often worth more than the amount printed on the face of the (paper) bond, however, the difference between the purchase amount and the cash in value is considered reportable interest. Note: Effective January 2012, Series EE Bonds and I Bonds are purchased electronically at face value and will earn interest for 30 years.
Myth #2. All series of savings bonds earn the same rate of interest.
Fact: Different series of savings bonds (E, EE, I, HH) are/were assigned different interest earning rates at the time they were purchased. For example, if you purchased a new Series EE and an I Savings bonds in the exact same month, they would offer different interest rates.
Myth #3. All savings bonds will keep the same interest rate throughout the life of the bond.
Fact: Depending on when the bond was purchased and the series of bond, different rates, rules and formulas are applied. For example, EE paper bonds purchased 1997-2005 earn a variable interest rate which can change every 6 months. EE bonds purchased 2005 and after earn a fixed rate of interest. Series I bond rates are calculated by combining a fixed rate portion (which remains the same for the life of the bond) with a variable rate portion (which changes every 6 months).
Myth #4. When the new savings bond interest rates are announced twice each year, these new rates become the interest rate for existing (older) savings bonds.
Fact: The new interest rates only apply to new bond purchases.
Here is what happens to older bonds: Let’s assume an EE savings bond was issued on April 1, it was assigned an interest rate for the first six months of its life. On November 1, new interest rates are issued. The interest rate from November 1 and April 1 is averaged, and the April 1st bond has a new “blended interest rate.” This process continues for every sixth month period. For both paper and electronic Series EE bonds issued 2005 and after, bonds are assigned a fixed rate that will be applied to that bond for the first 20 years.
Myth #5. When an owner cashes in a savings bond, there is a “special tax rate” to calculate the taxes on the proceeds from the bond(s).
Fact: Savings bond interest is consolidated with other earnings and expenses on an individual’s federal income tax return and the resulting gross taxable amount is taxed at an “ordinary income tax” rate. Savings bonds are not subject to state and local taxes.
With the fourth of July holiday upon us, it’s a great time for savings bond owners to dust off their savings bonds and obtain a complimentary SavingsBonds.com Bond Inventory Report. To create a complimentary Inventory Report, go to www.savingsbonds.com/calc and enter each bond. Once the information is stored, a color-coded, personalized Report will display cash in values along with interest rates, timing, maturity, and taxation details about each bond. A detailed, easy to understand, “what this means to you” legend will also be displayed and can be printed.
While it may have felt good and patriotic purchasing an American classic savings bond, checking financial performance to see if they are an investment still worth holding onto, might make one feel a little smarter.