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Savings-bond options shrink after Aug. 31

By Eileen Alt Powell
The Associated Press

NEW YORK — For years, Americans who invested in U.S. savings bonds had a safe haven if they didn't want to cash in their maturing securities and pay taxes on their earnings: the Series HH bonds.

Money rolled into HH bonds from maturing Series H, E and EE bonds could grow an additional 20 years tax-deferred.

On Aug. 31, the Treasury will stop issuing HH bonds, arguing that high transaction costs and low volume make them unprofitable for the government. The Treasury stresses that people who already own HH bonds — or invest in them before the end of August — can hold them to maturity.

Americans currently hold about $205 billion in savings bonds. Of those, $13.8 billion are HH bonds. HH bond sales this year have been running about 40 percent ahead of last year as the Aug. 31 conversion deadline approaches, said Peter Hollenbach, spokesman for the Treasury's Bureau of the Public Debt.

With the HH bond program ending, many savers need to take a careful look at their savings-bond holdings now so they decide what to do.

The first thing is to determine whether it pays to roll any or all of their bonds into HH bonds before the deadline.

Daniel Pederson, a savings-bond consultant and author of "Savings Bonds — When to Hold, When to Fold and Everything In-Between," pointed out that E and EE bonds currently are paying between 3 and 4 percent annual interest while the HH bonds have been assigned a 1.5 percent rate for the next 10 years.

They're unlikely to pay a higher rate in the following 10 years, Pederson said, because "the government has no incentive to ever raise the rate when it's eliminating the program."

That means conversion now could be costly, with consumers giving up as much as $250 per $10,000 in interest earnings every year.

"So my take on it is that for most people with more than three years of life left in their bonds, it won't make sense to convert to HH" because of the steep earnings loss, Pederson said.

Those who decide not to convert to HH bonds will have to face taxes on the earnings of their maturing bonds.

Some people wrongly think that if they hold their bonds beyond maturity, federal taxes aren't due until they're cashed. In fact, taxes should be paid in the year each bond matures or when it's cashed ahead of its final maturity date.

William Massey, a senior tax analyst at RIA, a New York-based provider of tax information for tax professionals, said savers need to look at their whole savings-bond portfolio and determine when their bonds mature so they can anticipate the tax impact.

He pointed out that the Treasury's site at www.savingsbonds.gov has calculators that consumers can use to determine exactly how much interest has accrued.

The best approach may be to "ladder" sales — say, for example, cashing in $50,000 worth of bonds out of a $250,000 portfolio every year for five years, Massey said.

That strategy will keep some savers from being pushed into a higher federal income-tax bracket. The interest on bonds also counts as income in determining whether Social Security benefits can be taxed, he added.

People with large savings-bond holdings may want to seek advice from a financial planner or tax professional before their bonds mature.

Robert Richards, a financial planner from Toms River, N.J., said that savers who pull their money out of bonds may find that "alternative investments that are extremely safe aren't paying very much" in interest.

On the tax side, he added, "each case is different."

For example, if people don't need the income from the bonds and want to avoid the taxes, "it might be a good idea to convert (to HH bonds) and look to systematically sell those bonds to spread the tax gain out over a number of years," Richards said. On the other hand, if people are going to need the money, "it could be better to cash them all in and pay all the tax in one year to avoid future taxes."

Some savers, especially seniors who are holding bonds they want to leave as a legacy to their children, have been very upset by the Treasury's move, said Jackie Brahney of SavingsBond.com, a bond advisory service based in Spring Lake Heights, N.J.

"A lot of people strategized to have the HH bond as an option," she said. "They feel this is like having the rug pulled out from under them."



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