Interest rates reset on savings bonds

The Treasury announced new interest rates on savings bonds: 4.84% on I-bonds and a puny 1.4% on newly-issued EE bonds. The EE bond rate applies for the next 20 years, which means it's basically a message from the Treasury not to bother buying EE bonds any more. EE bonds issued more than three years ago have rates that adjust every six months. The rate for bonds sold between May 1997 and April 2005 will be 2.74% for the next six months.

I bonds aren't quite the great deal they appear to be on the surface. I bonds carry a combination of a fixed rate that applies for the life of the bond and an adjustable rate tied to the rate of inflation. Well, the fixed rate on new bonds is zero, for the first time ever. That means earning any return depends solely on inflation. The fixed rate most recently was 1.2% and has been as high as 3.6%.

Can I convert savings bonds to a Roth IRA?

Q:  I have about $10,000 in savings bonds stretching from 1986 to about 1999, half in parents' names and half in childrens (both 17). Would like to convert into Roth IRA contributions. What are the tax ramifications of cashing in the bonds or can I convert them?

A: No conversions allowed. If the bonds are cashed, the owner will owe income tax on the accrued interest. For students the extra income may have a negative impact on financial aid eligibility if they will be going to college in 2009. If the bonds held in the parents' name are cashed when the children are in college, the interest income may be tax-free. See details on page 55 of this document.

 

How do the taxes work on my H savings bonds?

Q: Our H savings bonds reach final maturity in July. There is a taxable interest amount shown on the face of each bond. How is this reported to the IRS? Must the bonds be redeemed at one time?

A: The deferred interest shown on your bonds is taxable when the bonds are redeemed or they reach maturity, whichever comes first. Delaying redemption would mean you would not be earning any interest on the money but you would still owe the taxes. You report the deferred interest on your 2008 tax return.

Have you lost track of an investment? Here's help

Have you got an old stock certificate and no idea whether it's worth anything? Wondering about that old bank statement or passbook that shows money you can't remember withdrawing? Can't find those savings bonds you thought you tucked in a drawer?

Today's column offers some advice for tracking down investments. Of course merely having posession of a security or bank book doesn't mean you're entitled to the money. You'll also have to prove that you own it or that you are the legitimate heir or representative of the estate.

Can I claim a deduction for my grandson's tuition?

Question: How as a grandparent can I use EE savings bonds to pay my grandson's college tuition and deduct it from my income tax? If I use a pre-paid fund can I deduct the tuition from my income tax?

Answer: The answer to both those question is that you can't. It's great that you want to help out your grandson, but unless you claim him as a dependent on your tax return, you don't get any tax breaks for your generosity. IRS Publication 970 gives details on the tax breaks available for education.

Please help me understand I bonds!

Q. I bought I bonds in September 2003 and I don't understand how they work. How much am I earning? Is this a good investment or should I try to do better with a CD or money market account?

A. You shouldn't buy any investment you don't understand, but since you already own the savings bonds, you should take some time to learn about them before deciding to cash them in. The No. 1 thing to know is that the interest rate you earn changes every six months. The I bond rate has two parts. One part is determined by when you bought the bond and remains fixed for the life of the bond. In your case that part is 1.1%. The other part of the interest rate is based on the inflation rate, which will change every May and November.  According to the savings bond Web site, your bonds currently are earning a composite (the two parts considered together) interest rate of 4.22%. That makes them a decent, but not stellar investment. An additional benefit is that taxes on the earnings are deferred until you redeem the bonds. A drawback is that if you cash them in before five years, you will be charged a three-month interest penalty.

There is no one perfect investment for the future. If you think inflation is going to accelerate, I bonds look good. If you think interest rates are going to decline, long-term CDs look good. If you think interest rates are going to rise, money market funds look good.

Do I have to cash in my savings bonds when they mature?

Q. Do savings bonds have to be cashed in and/or interest reported in the year the bonds mature? Can the bonds be transferred or gifted after maturity?

A. No, yes and no. Nobody compels you to cash your bonds in the year of final maturity (30 years for most bonds), but they stop earning interest, so by holding them, you are making an interest-free loan to the government. IRS rules say that you are supposed to report the interest on your return when the bonds reach final maturity. Check the savings bond Web site for info on when bonds stop earning interest.

Once bonds have reached final maturity, they cannot be transferred. It wouldn't do any good anyway. If you transfer ownership of a savings bond to someone else, you are obligated to pay taxes on the interest earned up to that point.

New rate for I-Bonds

I-bonds just got to be a better deal. Those issued over the next six months will pay 4.52 percent interest, up from 2.41 percent. The interest rate on this type of savings bond has two components, a fixed rate that applies for the life of the bond (currently 1.4 percent), plus an adjustable rate based on the rate of inflation (currently 3.1 percent). If you shop around, you can do better than that in a short-term CD, but you won’t get the tax deferral savings bonds offer. Read more about I-bond rates here.

Using savings bonds to buy a Florida Prepaid Plan

Q. Is it possible to purchase a Florida Prepaid College Plan using money from savings bonds without paying taxes on the money? Also, can any member of the family do this--aunts, grandparents, parents?

A. Yes and no. For parents it's not only possible, but a great idea to cash savings bonds tax-free to buy a Florida Prepaid Plan for a child. However, the bonds must be in the name of the child's parent(s) and purchased in 1990 or later. Bonds in the names of other relatives don't get the tax break. Also income restrictions apply. Here are the rules for using savings bonds for education.

(Photo credit: Getty Images)

Savings bond interest rates reset Nov. 1

Savings bonds interest rates will reset next week, as they do every six months. Lately there's been speculation that I bonds in particular will become a better deal. The interest rate on these bonds is set in two pieces - a fixed rate that remains the same for the 30-year life of the bond and an fluctuating rate that adjusts every six months based on the rate of inflation. Right now the fixed rate is 1.4% and the inflation rate just 1% for 2.4% total. Expectations are that the new inflation rate will be 3.1%. If the fixed rate stays the same, I-bonds look like they could be worth owning once again. But if it's reduced, you might not want to buy them at all since competing investments like CDs pay higher rates.

For more info, here's an article from Bankrate.com and another from USA Today. Or visit the I-bond Web site.

(Photo credit: St Petersburg Times)

Can I get a tax break for building a house?

Q. I am in the process of having a home built and want to put up some monies along with a construction loan towards the building the house. I was told that any monies used to lower the principle loan amount of the construction loan is not tax deductible. I am having this house built on land that is vacant. Can I claim this money that I want to put down for the building of this house as a tax deduction? Also, I have savings bonds that I have been collecting for many years. If I were to cash them in, they will more than cover my down payment.  Should I cash them in and use the proceeds as my downpayment? Is there a tax deduction for this?

A. It would be nice if down payments were deductible, but alas, they are not. If you cash in your savings bonds, you will owe tax on the accrued interest.

Before cashing a significant horde of savings bonds, it's a good idea to consider the impact this extra income will have on your tax liability. You can find out what your bonds are worth and how much interest they currently are earning at this site.  Look at your taxable income from last year's return and the tax brackets on this site to determine the rate at which any additional income (your bond interest) would be taxed. If you can't figure this out for yourself, you might ask a tax preparer to help you. It might be worthwhile to cash some bonds this year and some next year to spread the liability over two years.

Of course you also need to look at what other options you have. For example, if your alternative is to take money from a money market that's paying more than your bonds are earning, cashing the bonds looks like a better idea. Keep in mind that you have to pay the taxes on the bonds eventually. They pay interest for 30 years.

(Photo credit: Getty Images)

Can I defer taxes on my savings bonds?

Q. I have some HH bonds that will soon expire. I converted these from EE bonds on which I never claimed the interest on my taxes, although I have been reporting the interest earned since the conversion. When they mature, can I convert the HH bonds to something else and continue tax deferral?

A. No. When the bonds mature, you'll have to pay taxes on the accrued interest. In fact, it's no longer possible to defer taxes on EE bonds by converting them to HH bonds as you did. No new HH bonds have been issued for the past two years. When currently outstanding bonds stop paying interest (20 years from issue), that will be the end of the HH line.

The good news is that you can earn a lot more on your money since HH bonds pay a lousy 1.5 percent interest.

What are savings bonds paying these days?

Q. Can you tell me what % is being paid for new EE bonds?  Also, the I bonds.

A. New EE bonds pay a fixed rate of 3.7%, while new I bonds pay a an adjustable rate that's currently 2.4%. Rates change every six months; the next adjustment will be Nov. 1. In the future you can go right to the source for information about savings bonds and other government securities.

Can I defer the tax on my savings bond interest?

Q. We were all set to cash in about $10,000 in EE and E bonds and put the proceeds into savings or CDs. Some are matured and some have not matured. Then the thought crossed my mind: Can I convert these directly to a T-bill, bond, etc. and receive a tax deferral on the gain?

A. No. If you cash the bonds, you'll owe the taxes. Back in a corner of your memory, you are recalling a feature of HH bonds, which no longer are issued.

You might run a what-if scenario to calculate whether you'd be better off to spread the cashing - and the taxes - over two years.

You may ask: How do I run a what-if scenario? The easiest way is to get a financial adviser to do it for you. If you're a do-it-yourselfer, take your 2005 tax return and adjust it for expected increases and decreases in income. You can do this for free using online tax software because typically you don't have to pay anything until you file or print your return, which you won't need to do in this case.