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Savers will have to say goodbye to HH bonds

By Associated Press
© St. Petersburg Times
published September 12, 2003

NEW YORK - Americans are about to lose a tool many have used to manage their U.S. Savings Bonds in retirement.

Savers traditionally have swapped maturing H, E and EE bonds for HH bonds to get up to 20 additional years of earnings before the taxes on their original investments came due.

Now, as part of a major modernization program, the Treasury has announced it will stop issuing HH bonds in the middle of next year.

Peter Hollenbach, a spokesman for the Treasury's Bureau of the Public Debt, said the HH bond "doesn't fit in" with the government's plan to move away from paper securities toward electronic, book entry securities.

Hollenbach emphasized, however, that all outstanding HH Savings Bonds will be honored.

The volume is considerable. The Treasury estimates that up to $16-billion of the $200-billion in total outstanding Savings Bonds are HH series.

The HH bonds operate differently from other U.S. Savings Bonds in that they can't be purchased. Instead, owners of other bonds like E and EE that are nearing maturity can "exchange" them for HH bonds, currently available in denominations of $500 to $10,000.

The Treasury pays semiannual interest - set at 1.5 percent in January, down from 4 percent for earlier issues - and resets the rate on the 10th anniversary of the bond.

Savers have used the HH bonds to help reduce the taxes on their maturing bonds, said Daniel J. Pederson, author of the book "Savings Bonds - When to Hold, When to Fold and Everything In-Between."

He gave as an example the case of a saver who invested $7,500 in an E bond with a face value of $10,000 in January 1975. At final maturity in January 2005, that bond will be worth about $50,000, and a saver who cashed it would owe taxes on the $42,500 gain.

If the saver is still working and in a high tax bracket, there could be a big tax bite, Pederson pointed out. But by rolling the maturing E bond into an HH bond, the saver could delay the taxability for up to 20 years - when the saver is likely to be retired and in a lower tax bracket.

Pederson suggested that savers who think they want to take advantage of the HH before it's discontinued should try to do an exchange late this year or early next year "because the government has a history of announcing changes and not giving people enough time to make choices."

Jack Quinn, chief executive officer of, said the U.S. Treasury already is trying to discourage the use of HH bonds.

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