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Savings Bond News > Savings Bonds Exit Strategy - Phase III (part B) (2/2012)  
Savings Bonds Exit Strategy - Phase III (part B)    Share
by The Savings Bond Guru
Earlier in 2011, I discussed the first two phases of exit strategies for savings bonds based on the first and second 10 year periods, or the initial 20 years, of the 30 year interest bearing life of savings bonds issued since December of 1965. I also discussed one option for disposing of the bonds to grandchildren so that the owner would not be liable to report the interest earned from the date that the bond was originally issued.
Keep in mind that by the time a bond reaches its third phase of life, the circumstances of the original purchaser/owner may be very different from when he/she began purchasing savings bond(s) as long as twenty or more years ago.
But if the owner is intent upon cashing in the bonds to use the proceeds to support him or herselves in their retirement years, there is some serious future planning required so that the owner is not stuck with a huge tax bill because he/she cashed-in all of the bonds in the same year. The wise savings bond owner will create a plan to cash-in only a few bonds in any year so as to spread out the amount of interest income that must be reported on their tax return each year.
Many bond owners make the huge mistake of waiting until the bonds have reached their Final Maturity Date - when the bonds are 30 years old, and they have stopped earning interest - before they even think about cashing them in. They want to squeeze every penny out of Uncle Sam. This mistake is sometimes caused by the bond owner's lack of understanding that they can cash-in their savings bond(s) before they reach their Final Maturity Date. While the owner might lose some interest by cashing-in their bonds before they mature, this decision must be weighed against the amount of taxes that must be paid upon cashing-in the bonds if they are held to final maturity.
Another factor to be considered in planning for the timing of cashing-in savings bonds is the amount of other income such as CD's, pension(s), social security, 401k, Keogh or any other types of qualified benefits that the bond owner anticipates receiving during his/her retirement years. Furthermore, if the spouse will also be entitled to her own retirement income, (such as previously described), those monies must also be considered when creating the financial plan.
And finally, the ages of the husband and wife must be factored in because of the Required Minimum Distribution (RMD) of the investments upon the date when the husband and/or wife reach the age of 70 and 1/2.
But the beauty of savings bonds is the very fact that they can be cashed in at any time that you choose before they actually mature. I have received many cries for help from savings bond owners when they realize that there is a sizeable, taxable issue when they cash-in their savings bonds because they didn't include their savings bonds when they created their financial plan. At this point it is too late for making a plan when what they really need is a miracle.
But the solution is very obvious: learn as soon as possible all about your savings bonds so that you can consider the value of your investment in savings bonds, along with the amount of taxable interest income that you will have to report, once the bonds are cashed-in.
Most bond owners don't realize the total value - and the taxable portion - of their savings bonds because they don't take the time to review their savings bond holdings until it is too late. Savings bond owners are surprised to learn that their savings bonds are worth five, six, or in some cases, as much as seven times their Face Value at Final Maturity.
Consider a $100.00 series EE (face value) savings bond that can be worth as much as $570.00 at maturity. Since the owner only paid $50.00 for the bond when it was issued, $520.00 must be reported as taxable income on that person's Federal Income Tax Return. It is not unusual for me to hear from shocked and angry savings bond owners that had their entire financial plan reduced to a shambles because they didn't include their savings bonds in their financial plan or they didn't cash-in their savings bonds before they reached Final Maturity.
The answer to preventing these kinds of taxation problems is very clear - know what is happening to your savings bonds all the time. It is so inexpensive to obtain a quality reporting service - such as the Savings Bond VIP Club - with its Savings Bond Inventory Report, available for review 24 hours a day 7 days a week along with the Savings Bond Alerts Report - automatically sent to every owner via email at the beginning of every month - to help you understand everything important that their is to know about your savings bond(s).
The wise investor is always on top of all of the money he/she is entitled to. Don't make the same mistakes that others have made by not keeping track of your collection of savings bonds. You will be so happy that you did.
Good luck, good health and best wishes,
The Savings Bond Guru
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