You might have some Series EE savings bonds that you acquired a long time ago. Maybe you keep them in a filing cabinet or a safe deposit box and just think about them once in a while. You might be curious in how EE bond interest is taxed or when they stop earning interest. If they reach their final maturity date, you may need to take steps to avoid any losses or unexpected tax penalties.
Interest deferral on savings bonds
The interest rate for Series EE Bonds issued after May 2005 is set. A variable market-based rate of return is earned on bonds purchased between May 1997 and April 30, 2005.
Bonds in the Paper Series EE were sold for half their face value. If you own a $50 savings bond, for example, you paid $25 for it. Until the bond matures, it isn’t worth its face value. (EE bonds are no longer issued in paper form by the US Treasury Department.) Electronic Series EE Bonds are sold at face value and are redeemable for their full face value.
The minimum duration of ownership is one year, however if the bond is redeemed during the first five years, a penalty is levied. The bonds pay interest for a period of 30 years.
How savings bonds are taxed
Currently, Series EE bonds do not pay interest. Instead, the accumulated interest is represented in the bond’s redemption value. Tables of redemption values are published by the US Treasury.
Unless the owner elects to have it taxed annually, interest on EE bonds is not taxed as it accrues. If you make an election, you must disclose any previously accrued but untaxed interest in the election year. The majority of the time, this option is not made, therefore bondholders do not profit from tax deferral.
If the option to report interest annually is selected, it will apply to all future savings bonds. That is to say, the choice cannot be made bond by bond or year by year. There is, however, a method that can be used to cancel the election.
If the election is not made, when the bond is redeemed or otherwise disposed of, all of the accrued interest is finally taxed (unless it was exchanged for a Series HH bond). Even after achieving face value, the bond continues to earn interest, but at “final maturity” (after 30 years), interest ceases accruing and must be recorded.
Note that the interest on EE savings bonds is not taxed by the state. You may be able to avoid paying federal income tax on your interest if you use the money for higher education.
Deferral on savings bonds
One of the most compelling reasons to purchase EE savings bonds is the ability to accumulate interest without having to disclose or pay tax on it. Unfortunately, the law prevents this tax-free accumulation from continuing indefinitely. The bonds stop earning interest when they reach their final maturity date.
After 30 years, the Series EE bonds issued in January 1989 achieved their final maturity in January 2019. Not only have they stopped earning interest, but all of the accrued but untaxed interest will be taxable in 2019.
Is interest still paid on Series E bonds?
Interest is paid on EE bonds until they reach 30 years or you cash them in, whichever comes first. However, if you cash them before the 5th year, you will forfeit the final three months’ interest. (If you cash an EE bond after 18 months, you’ll get the first 15 months’ interest.)
Do savings bonds earn interest once they reach maturity?
In about 30 years, most savings bonds stop earning interest (or achieve maturity). A savings bond can be redeemed as soon as one year after purchase, but it’s normally best to wait at least five years so you don’t miss out on the last three months of interest. If you redeem a bond after 24 months, for example, you will only receive 21 months of interest. It’s usually better to wait until your bond reaches full maturity, depending on the interest rate and your individual financial demands.
What are Series E bonds used for?
Because Series E savings bonds are in paper format, bringing them to your banking institution is the simplest way to cash them in. Your bank or credit union can assess the value of the bonds based on the date they were issued and the interest rate at the time, and then give you the money you’re owed.
After you’ve cashed in your savings bonds, you can either utilize the money for immediate necessities or invest it in Series EE savings bonds or other investments (such as stocks and other bonds) that may provide a better return.
What makes Series E and Series EE savings bonds different?
Series E bonds were sold at a discount to their face value and may be redeemed at face value after ten years. Following legislation, investors might receive interest on their Series E bonds for up to 40 years, depending on when they were issued. In 1980, Series EE bonds took the place of Series E bonds. According to the US Treasury Department, the last Series E bond stopped paying interest in 2010. TreasuryDirect is the official website of the United States Treasury Department. Series E bonds are no longer available for purchase.
What is the best way to avoid paying taxes on EE bonds?
Cashing your EE or I bonds before maturity and using the money to pay for education is one strategy to avoid paying taxes on the bond interest. The interest will not be taxable if you follow these guidelines:
- The bonds must be redeemed to pay for tuition and fees for you, your spouse, or a dependent, such as a kid listed on your tax return, at an undergraduate, graduate, or vocational school. The bonds can also be used to purchase a computer for yourself, a spouse, or a dependent. Room and board costs aren’t eligible, and grandparents can’t use this tax advantage to aid someone who isn’t classified as a dependent, such as a granddaughter.
- The bond profits must be used to pay for educational expenses in the year when the bonds are redeemed.
- High-earners are not eligible. For joint filers with modified adjusted gross incomes of more than $124,800 (more than $83,200 for other taxpayers), the interest exclusion begins to phase out and ceases when modified AGI reaches $154,800 ($98,200 for other filers).
The amount of interest you can omit is lowered proportionally if the profits from all EE and I bonds cashed in during the year exceed the qualified education expenditures paid that year.
What is the value of a $50 bond after 30 years?
Savings bonds are regarded as one of the most secure investments available. The underlying principle is that the value of a savings bond grows over time, but it’s easy to lose track of how much it’s worth over time.
The TreasuryDirect savings bond calculator, fortunately, makes determining the value of a purchased savings bond a breeze. You’ll need the bond series, face value, serial number, and issuance date to figure out how much your savings bond is worth.
If you bought a $50 Series EE bond in May 2000, for example, you would have paid $25. At maturity, the government committed to repay the face amount plus interest, bringing the total value to $53.08 by May 2020. A $50 bond purchased for $25 30 years ago is now worth $103.68.
EE savings bonds pay interest on what day of the month?
Rates on savings bonds (specified in 351.13) apply to earnings earned during the first semiannual rate period beginning on or after the rate’s effective date. Interest is compounded semiannually and credited on the first day of each month. Interest begins to accumulate on the fourth month after the issue date. Because of the 3-month interest penalty, interest on a bond issued in January is first credited on May 1, which represents one month of interest. The following table shows the months that make up the semiannual rate period during which interest is earned at the announced rate (disregarding the penalty for bonds redeemed before 5 years after the issue date) and the months in which the bonds increase in value for any given month of issue with rates announced each May and November. This is a semiannually compounded annual rate.
Is it wise to invest in I bonds in 2021?
- I bonds are a smart cash investment since they are guaranteed and provide inflation-adjusted interest that is tax-deferred. After a year, they are also liquid.
- You can purchase up to $15,000 in I bonds per calendar year, in both electronic and paper form.
- I bonds earn interest and can be cashed in during retirement to ensure that you have secure, guaranteed investments.
- The term “interest” refers to a mix of a fixed rate and the rate of inflation. The interest rate for I bonds purchased between November 2021 and April 2022 was 7.12 percent.
EE bonds or I bonds: which is better?
If an I bond is used to pay for eligible higher educational expenses in the same way that EE bonds are, the accompanying interest can be deducted from income, according to the Treasury Department. Interest rates and inflation rates have favored series I bonds over EE bonds since their introduction.