What exactly happens to savings bonds after 30 years?

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What exactly happens to savings bonds after 30 years?

Postby SSSS » Thu Jul 08, 2010 1:34 pm

So, savings bonds stop earning interest after 30 years. But, do they auto-redeem at 30 years, meaning you HAVE to take the taxable income at that point, or can you keep them unredeemed, earning no interest, until you actually need/want to cash them in?

Does it make any difference between paper & electronic? Seems like auto-redemption wouldn't work well especially for paper bonds, since they might not have a reliable way to get the money & tax paperwork to you unless you've been keeping your address updated.

I'm about to turn 30, and I have some EE bonds that'll be turning 30 just a few months later. Oddly, I don't remember buying them, but my name is definitely on them. I converted them to electronic form by mailing them to Treasury Direct a few years ago. I'm also wondering about the savings bonds I'm buying now; they'll be hitting 30 about the time I'm 60 and I was wondering if I'd have to cash them in at 30 years or if I could just let them sit there earning no interest until it made more sense to cash them in.
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interest

Postby hollowcave2 » Thu Jul 08, 2010 1:42 pm

After 30 years, savings bonds simply stop earning interest and the federal tax is due in that year, regardless whether you redeem it or not. I'm not aware of any auto-redeem feature. It would be nice if Treasury Direct treated them like Treasuries, where the proceeds are placed in the non-interest-bearing account on maturity. But I haven't seen that feature. I also haven't held any savings bond for 30 years in Treasury Direct.

It doesn't give you any advantage to hold onto a savings bond past final maturity. You still owe the taxes anyway. A lot of people have forgotten about bonds stashed away somewhere, so I think the IRS would be very lenient on this issue.

Maybe Mel can offer his thoughts.

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Postby NYnative » Thu Jul 08, 2010 1:56 pm

Yup, after 30 years there is no more interest and a tax bill, whether you cash them or not. Back before computers, my parents bought a bunch of bonds during WWII and put them in a drawer. They all hit the 40 year mark (an extra 10 years was added for the WWII bonds) in the mid-80s but no tax bill was received as they had never been entered in a database. I did pester my parents to cash them in and then pay the taxes, but they decided to roll them over to HH bonds to defer the taxes even further (HHs pay current income, which is taxable). You can't do that anymore, but it was a useful tool. Still have some of those left (not from the WWII bonds, but later issues - HHs are only good for 20 years), but the interest rate resets every 10 years and it's currently 1.5%.
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Postby kramer » Thu Jul 08, 2010 2:46 pm

It sounds like in some cases it would make sense to cash in some of the bonds a bit early in order to lower your tax rate in a given year.

Over how many years you cash them in would have to be weighed against the opportunity cost of reinvesting the money and one's particular tax situation.

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Postby El Jefe » Thu Jul 08, 2010 3:56 pm

It doesn't give you any advantage to hold onto a savings bond past final maturity. You still owe the taxes anyway.


I don't think that's always true.

Someone please correct me if I'm wrong on this: It might make sense to defer cashing in the bonds if you anticipate a lower tax bracket in the next couple years or so. Timing this decision could make a real difference in your total tax bill and after-tax interest.

But generally, I believe your point is correct.
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Postby kaneohe » Thu Jul 08, 2010 4:26 pm

El Jefe wrote:
It doesn't give you any advantage to hold onto a savings bond past final maturity. You still owe the taxes anyway.


I don't think that's always true.

Someone please correct me if I'm wrong on this: It might make sense to defer cashing in the bonds if you anticipate a lower tax bracket in the next couple years or so. Timing this decision could make a real difference in your total tax bill and after-tax interest.

But generally, I believe your point is correct.



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under IRS regulations, tax is due on the interest in the year the bond is cashed or it reaches final maturity. If you hold the bond beyond 12/31 of the final-maturity year, then when you finally get around to cashing it, you will not only owe the tax on the earnings, but interest and penalties besides.....from a google search........so the tax is calculated for the year the bonds matured, not the year of your choice.
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Re: interest

Postby SSSS » Thu Jul 08, 2010 6:06 pm

Thanks for the information, all.

hollowcave2 wrote:After 30 years, savings bonds simply stop earning interest and the federal tax is due in that year, regardless whether you redeem it or not.


I bet tax compliance on this is really low, especially with paper bondholders. I assume they attempt to mail a tax statement to the registered address but most of the addresses are probably wrong.
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Re: interest

Postby dbr » Thu Jul 08, 2010 8:56 pm

SSSS wrote:Thanks for the information, all.

hollowcave2 wrote:After 30 years, savings bonds simply stop earning interest and the federal tax is due in that year, regardless whether you redeem it or not.


I bet tax compliance on this is really low, especially with paper bondholders. I assume they attempt to mail a tax statement to the registered address but most of the addresses are probably wrong.


I can't imagine the Department of the Treasury fails to get the IRS's copy of the 1099 correctly delivered.

I also imagine that within some reasonable period of time after tax return filing that the IRS letter to the tax payer asking what for about the missing tax entry will also be successfully delivered.
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