As we move into a new year, ourthoughts turn to diets, ditching bad habits and seeking inner calm.
But addone more thing tothe financial list of things that require our attentionin 2016 — U.S. savings bonds.
Thanks to higher interest rates in 1986, savings bonds were a hugedeal at the timeand maybe almost as hot in some minds asWall Street. Now 30 years later, the new year will mark a milestone when millions of Series EE savings bonds bought in 1986will stop earning any more interest at various months in2016, depending on when the bond was issued. And those bondsneed to be cashed.
But here's the trick,no one is going to send you any notice on this deal or automatically redeem these bonds for you. It's totally up to you.
Unfortunately, savings bonds are one of those things that many of us have learned to ignore.But big money could be hiding in shoe boxes, safe-deposit boxes and elsewhere amongthe savings bondsthat you once found tucked in birthday cards, bonds bought through payroll deduction or inherited from Mom or Dad.
Nearly $12 billionin savings bonds were bought in 1986 alone. Many of those bonds have yet to be cashed. As of the end of October, more than 12.5 millionSeries EE savings bonds bearing 1986 issue dates were outstanding, according to the federal Bureau of the Fiscal Service.
Only a few years showed greater sales for savings bonds, according to Daniel Pederson, author of Savings Bonds: When to Hold, When to Foldand president of theSavings Bond Informer. Other big years: 1992, with $17.6 billion in bonds sold; 1993, with $13.3 billion; and 2005, with $13.1 billion.
Buying savings bonds was trendy in 1986 because bonds bought from January through October 1986 had an initial rate of 7.5% for the first 10 years. But the rate was set to fall to 6% on newly purchased savings bonds beginning in November 1986.
So, you guessed it: People really loaded up on 7.5% bonds in October 1986.
Pederson said his former office at the Federal Reserve Bank branch in Detroit received more than 10,000 applications for savings bonds in the last four days of October 1986. Typically, the office would see about 50 applications for savings bond purchases each day at that point.
"Buyers snatched up billions in bonds during those final days of October 1986. Most did not realize that the 7.5% was good for only the first 10 years of the bond's life," he said.
Here are five things to know about savings bonds:
1. What's the bond really worth?
The $50 face value on the bond doesn't mean it's worth $50. Back in 1986, for example, you paid $25 for a $50 Series EE bond. So you've been building up interest toward the $50 value and beyond.
How much money you get when you cash your bond wouldvary considerably on the bond and what interest rates were paid during the lifetime of the bond.
Figure out the value withthe Savings Bond calculator at the government website atwww.treasurydirect.gov. You'd plug in a set of numbers listed onyour savings bonds and then the government site will list how much the bond is worth now, the next interest payment, when the bond hits final maturity.
Pederson also has a service at www.bondhelper.com and 800-927-1901 that offers a customized statement and phone consultationsfor a fee for savers and financial planners.
2. How much money could we be talking about here?
Plenty — especially if you have a stack of bonds.
What's important to realize is that some people still haven't cashed other savings bonds from early inthe 1980s, either. More than 7.2 million Series EE savings bonds issued in 1985, for example, remained outstanding and not cashed yet,as of Oct. 30, 2015.After 30 years, these bonds stop earning more interest.
A $50 Series EE savings bond with a picture of President George Washington that was issued in January 1986 was worth $113.06 as of December. The bond will earn a few more dollars in interest at the next payment in January 2016.
A $500 savings bond with a picture of Alexander Hamilton, a founding father andthe nation's first Treasury secretary, that was issued in April 1986 was worth $1,130.60 as of December. The next interest payment is in April 2016.
All bonds bought in 1986 are currently earning 4% until their final maturity date. So you do want to pay attention to when the next interest payment is made onto the bonds.
Savings bonds bought earlier in the year in 1986 paid the7.5% forfirst 10 years. The bonds bought in November and December 1986 paid 6% for the first 12 years. After that, they both earned 4%.
The bonds bought in 1986will be hitting final maturity and stop earning interest in various months depending on the issue date. If you bought a Series EE bond in February 1986, for example, it will receive its last bit of interest on Feb. 1, 2016.
Look at the top right corner of the bond to find the issue date.
History shows commodities tend to beat bonds in rising-rate times
3. Where can I cash the bond?
Often, it's easier to cash U.S. savingsbonds, especially large amounts, at onceif you're a customer at a given bank.Comerica Bank, for example, will cash Series E, EE and I savings bonds that amount to less than $1,000 for non-customers and customers. But in order to cash savings bonds worth $1,000 or more, you must be an established Comerica customer.
Chase and PNC Bank also havea $1,000 limit cashing savings bondsfor non-customers.
If you have a stack of 400 bonds, as some customers do, you might want to call a bank in advance to check a good time to come into the bank.
Joyce Harris, a spokeswomanfor the federal Bureau of Fiscal Service, said it can be good idea to check with the bank first on any dollar limit that the bank might have for cashing a stack of bonds at once. Advice: Don't sign the request for payment on the back of your bond until you are at the financial institution and are instructed to sign the bond.
Remember,banks will have different policieson how much they will redeem in one visit. Some banks and credit unions also will not redeem savings bonds at all.
4. What kind of taxes will I owe?
First, you need to figure out how much of the money you receivecan be attributed to interest.
Believe it or not, many people don't realize that they don't pay taxes on the entire amount of money they receive when they cash a U.S. savings bond, saidGeorge W. Smith IV, a certified public accountant.
What you originally paid for the savings bond — or the principalportion — is not taxable. The interest earned is taxed at regular income tax rates, not as a capital gains income tax rate.
"The interest is not taxable at the state level," Smith said.
So if you had a $500 bond issued in April 1986, it would be worth $1,130.60 if you cashed it in December 2015. The buyer of the bond — be it Mom or Dad or Grandma or you — paid $250 for that bond. So in this case, $880.60 of interest would be taxable.
Why you still need bonds in retirement
What if you cash all the 1986 bonds that hit final maturity in 2016? Then, you'd pay taxes on those bonds on the 2016 tax return.
It is important to factor in the interest and save your paperwork to prepare your tax returns.
Joseph DeGennaro, tax director for Doeren Mayhew in Troy, Mich., said one elderly client cashed in some savings bonds at one point but didn't realize she needed to report the interest income. But a year later, the Internal Revenue Servicesent her a tax bill plus interest and penalty for not reporting the income.
Pederson noted that some big savers are cashing in some of their 1986 bonds in 2015 and forgoing some interest in order to avoid bunching all of the interest in 2016. He recommends talking to a tax professional to see what works best here and realize that you would missout on the final one or two interest ratepaymentsat 4% that would have taken place in 2016 if you cash the bonds in 2015.
The government's TreasuryDirect.gov website also gives some details onwho owes the tax and other tax questions.
It is possible to report interest every year as it builds. But most people tend to put that off and report the interest when they cash the bond. Technically, the savings bond site notes that even if you've not already cashed the bond, you would owe taxes on interest in the year that the bonds stop earning interest and reachesfull maturity.
Pederson said the rule is that you must report interest earned on a bond in the year it reaches final maturity or when you cash it, whichever comes first.
5. What's the interest rate you'd get if you bought savings bonds online today?
Nothing close to 4% anymore.
Now aSeries EE savings bondissued from November 2015 through April 2016 will earn a fixed rate of 0.10% — so they're not all that exciting.
A new Series I savings bond issued during that same time wouldearn acomposite rate of 1.64% for the first six months after the issue date — and a portion of that is indexed to inflation every six months. So the Series I savings bond has an interest rate that will fluctuate considerably over time.
See www.treasurydirect.gov for information on how to buy bonds and how to sell them.
Contact Susan Tompor: 313-222-8876 or stompor@freepress.com. Follow her on Twitter @Tompor.
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