Get the most out of your savings bonds

Do you have a large investment in US government savings bonds ? If not, should you have it? For investors whose priority is the safety of their investments, savings bonds continue to have advantages over certificates of deposit . Savers put more than $ 631 million into these bonds last year. Those of you who have a large investment in them will find that, to your surprise, some of these bonds are paying 4-5% interest.

There are two types of savings bonds — series EE bonds that carry fixed interest rates and series I bonds, whose rates fluctuate and change with inflation every six months. You have to keep them for at least a year. If you sell them before the five-year term, you pay a penalty equal to three months of interest. Bonds generally stop paying interest after 30 years.

Almost all savings bonds today are sold electronically through treasurydirect.gov. You can invest up to $ 10,000 annually for each type of bond (you can double this amount if your spouse also buys). If you request that your tax refund be paid to you in bonds, an additional $ 5,000 in traditional Series I paper bonds are available to you.

Series I bonds are the most popular. As of this writing, a new bond pays a 1.48% return on your investment — but before you discard them, consider what the competition is paying. A 5-year CD may pay 2%, but it does not offer inflation protection. You are taxed on interest received annually, unless you buy it through a personal, tax-deferred retirement account . You also pay taxes at all levels — federal, state, and local. The income you receive from savings bonds is tax-deferred that is then paid only at the federal level.

A brief comment on series EE bonds: the new bonds pay (if you can say so) only 0.1%. If you’ve had them for 20 years, you’ll earn at least 3.5%, thanks to a guaranteed retroactive payment. But it doesn’t seem to be very attractive.

If you’ve had savings bonds for years and are ready to sell them, find out exactly how much each bond is worth. Without that information, you could make one of four big mistakes, says Jackie Brahney, director of marketing for savingsbond.com, a service that helps you manage your bond portfolio.

Mistake 1: You sell the oldest bonds first. They may be the ones that pay you the most.

Mistake 2: You only look at the face value of the bonds when deciding how much to sell. This could lead to more taxable income than you want. Bonds with a face value of $ 3,000 may be worth $ 6,000 once interest is added.

Mistake 3: You sell so many bonds at the same time that the accumulated taxable interest puts you on a higher tax scale.

Mistake 4: You sell a bond the day or week before a six-month interest payment is due.

Free calculators are available at treasurydirect.gov and savingsbonds.com that tell you the value of each of your bonds. The service that Brahney offers for only $ 5.95 a year will evaluate your bonds and inform you monthly how much they are currently earning and the amount of interest they have accumulated. Having accurate information about your bonds can help you save on taxes and increase your income, too.

Jane Bryant Quinn is a personal finance expert and author of Making the Most of Your Money NOW.

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