Savings bonds are often something that people have access to either because they purchased them directly, or because they were gifted years ago by a loved one. However, it can be stressful to decide what you want to do with savings bonds after they’ve matured.
U.S. Savings Bonds are a way for the government to allow citizens to “buy” federal debt. This helps the United States continue to fund various initiatives. For example, Series E War Bonds were very popular during World War 2, when the government needed to immediately fund military efforts overseas. Savings bonds can still be purchased today through TreasuryDirect.com, but investors can only purchase up to $10,000 in a calendar year.
Bonds can usually be redeemed 12 months after they were initially purchased. However, most investors wait to redeem bonds until they’ve matured – between 15 and 30 years depending on the bond type you’ve purchased. In general, there are three different types of savings bonds currently available or in circulation:
Series EE savings bonds are worth their face value at redemption, and mature at a fixed rate of interest. Series I savings bonds, on the other hand, offer a rate of interest subject to inflation. If you own savings bonds, you can find out what they’re currently worth (and if they’ve matured) by using the Treasury Direct’s redemption table.
Wondering what to do with your savings bonds? Often, cashing them out and using the funds for a small financial goal is what most investors do. However, bondholders will owe taxes on any interest earned when they redeem their bonds. One way to sidestep this is to leverage your savings bonds to cover education expenses.
When you redeem your bonds, you can claim an education tax exclusion that allows you to exclude the interest paid to you upon redemption from your gross income if you meet the following requirements:
Note that if you received the bonds as a gift, and you were under the age of 24, neither you nor your parent can claim the exclusion.
Treasury Direct is a wealth of information about all things savings bonds. Whether you have questions specifically about the education tax exclusion, or you just want to understand how to redeem the bonds you have, visiting their Treasury Securities & Programs center is a fantastic place to start.
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"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.