ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, October 14, 1996 TAG: 9610150144
SECTION: MONEY PAGE: 6 EDITION: METRO
DATELINE: NEW YORK
SOURCE: JANE BRYANT QUINN WASHINGTON POST WRITERS GROUP
If you're holding some Series EE Savings Bonds that still pay a guaranteed 7.5 percent interest, tell them hail and farewell. The last of those excellent bonds reach maturity THIS month. Their new guaranteed rate is dropping to 4 percent.
All bonds more than 40 years old have stopped earning interest. All bonds issued after November 1965 stop earning interest 30 years from the issue date. Those bought in 1966 are gradually running out this year.
So check for old bonds in your safe-deposit box or among the papers of elderly relatives. More than $2.3 billion have never been redeemed.
The question is, what to do with these bonds - both those now dropping to a lower interest rate and those that are earning nothing at all. Where else can you get an acceptable, safe return?
And what if you're about to retire and want an investment that pays interest in cash? E and EE bonds don't pay out cash. Their earnings build up internally, payable only when the bonds are redeemed.
A common solution - for people who want current interest and for people whose bonds have expired - is to roll their investment into Series HH bonds. After expiration, you have one year to make the switch.
The rollover defers the tax on the interest your E and EE bonds have earned for up to 20 years. You'll owe taxes only on the 4 percent annual interest that HH bonds pay semiannually.
But HH bonds are often a poor choice, said Daniel Pederson of The Savings Bond Informer in Detroit, who analyzes savings-bond holdings for a fee (800-927-1901). Many people can increase their incomes by handling their bonds another way.
Here's the best choice, for savers who want their income government-guaranteed: Sell your E or EE bonds, pay the tax and use the proceeds to buy 20-year Treasury securities. That's the same maturity you'd have with HH bonds, but you'll earn a higher income after tax.
As an example, presume you own EE bonds worth $31,000 that you've held for 10 years. Rolled into HH bonds, they'd yield an income of $1,240 a year. But if you redeem them, pay the tax and buy 20-year Treasuries at 7 percent, you'd earn $2,020 annually in the 15 percent federal tax bracket -$780 more than the HH bonds pay, Pederson said.
The same holds true for all the other brackets. Even in the top, 39.6 percent bracket, 20-year Treasuries would pay $1,740, which is $500 more than the HH bonds do.
If selling all your EE bonds at once will put you into a higher bracket, sell them over two years or more. You might dispose of half of them in December and another half in January.
You can buy Treasuries directly from the Federal Reserve Bank, at no sales commission. For information, call the Fed at (202) 874-4000 or your nearest Federal Reserve branch. (The closest to Western Virginia is the Federal Reserve Bank of Richmond. The phone number is (804) 697-8355.) On the Internet, look for Treasury Direct on the New York Federal Reserve's Web site, http://www.frb.ny.org.
Like EE bonds, Treasury bonds pay interest that is exempt from state and local taxes. Only federal taxes are due.
There's a second choice for people who don't want to switch to Treasury bonds. You might keep the EE bonds as long as they're still earning interest, and cash in enough of them each year to create an income for yourself. You could cash in roughly enough of the EEs to create the same income you'd get from Treasuries. Only part of each bond redemption is taxable; the rest is a nontaxable return of principal.
Selling your EE bonds, paying the tax and buying Treasury bonds is the best choice, by far, for people in the 15 percent and 28 percent brackets, and it's marginally better for those in the 33 percent bracket.
In the top, 39.6 percent bracket, it's better to keep your EE bonds, if they're still paying interest, and cash in some of them every year.
There is no scenario where it's better to switch to HH bonds, Pederson said, as long as your tax bracket remains constant. The switch might work only if you're dropping to a lower bracket.
People may switch anyway because paying current taxes makes them break out in a rash. But that's an expensive allergy. Smart investors bite the tax bullet and go for the best possible return.
LENGTH: Medium: 80 linesby CNB