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Time Running Out on Savings Bond Strategy

Sat Aug 7, 2004
By Linda Stern

WASHINGTON (Reuters) - The Treasury has laid a "limited time" offer on the table, and too many savings bondholders may be grabbing it. The offer -- trade your E and EE bonds for HH bonds and save on taxes -- expires August 31, the date after which new HH bonds will no longer be issued.

But most bondholders will probably be better off watching that date come and go, without taking any action.

"There are people converting who shouldn't be," says Dan Pederson, president of The Savings Bond Informer, a Detroit consulting and reporting service. "They're running out because they don't want to miss out, but they'd be better off staying where they are."

Here's how it all works: Holders of E and EE bonds typically defer the interest those bonds earn until they cash them in. Most E and EE bonds earn interest for 30 years before they reach their "final maturity date" and no longer earn interest. Then they have to be cashed in, or traded for an HH bond.

Bondholders who cash in bonds they've held for a long time often can end up with a large tax hit when all that interest is declared at once.

If, instead, they trade them in for HH bonds, it's like a rollover that allows them to defer the tax hit for another 20 years. Any E or EE bondholder can trade in their bonds for HH bonds before the end of August, even if their bonds have not reached that final maturity date.

But, here's why they may not want to: HH bonds are paying 1.5 percent interest, a rate that will stand for 10 years. Most savings bonds are paying around 4 percent; some are paying more than that, and those rates are adjustable every six months. Recent economic events would indicate that those rates will go up, not down.

So, if your 4 percent bond still has years to go before it hits the final maturity date, you'll be giving up a lot of interest for that tax deferral. And when you finally sell that HH bond, you'll still have a big tax hit to contend with.

Those savings bondholders who might do best to take the HH trade are those who own bonds within 5 years of final maturity and who are about to move into a lower tax bracket because they will be retiring, says Pederson.

Bondholders who trade into HH bonds are required to hold those HH bonds for only six months before selling them, so they can use them to transition to the lower tax bracket and then unload them for a higher-paying investment.

Anyone who still has five years or longer before their bonds mature should rethink a rush to HH. Instead, they can cash in a portion of their bonds every year, so they aren't hit with too big a tax bill in any single year.

You can find out how much your bonds are worth now, how much interest they are paying and when they will hit final maturity by checking the calculators at the Treasury's own Web site: http://www.publicdebt.treas.gov/sav/savprice.htm.

To trade your EE or E bonds for HH bonds, you can go to most commercial banks, which will take your bonds and send the transfer application to a Federal Reserve bank. Or, you can fill out the exchange forms yourself and send them to the Federal Reserve Bank nearest you. It takes a few clicks, but if you follow the links on the Treasury's Web site, http://www.publicdebt.treas.gov, you can find the HH exchange forms for download and the Federal Reserve Bank addresses you'll need.

If you are determined to make the switch, do it sooner, rather than later. If your application doesn't make it to the right desk by August 31, you'll be out of luck. (Linda Stern is a freelance writer who covers personal finance issues for Reuters. Any opinions in the column are solely those of Ms. Stern. You can e-mail her at lindastern(at)aol.com).




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