If you have old savings bonds kicking around in a desk drawer or tucked in a safe deposit box, you might want to trade them in for HH bonds sometime in the next four months. After Aug. 31, you won't have the option.
The government is discontinuing HH bonds on the grounds that the program costs too much to administer. Disappearing along with it is the opportunity for an extra 20 years of tax deferral.
HH bonds are a type of savings bond that can be purchased only with the exchange of E and EE savings bonds that are at least 1 year old but not more than one year past their final maturity dates. E and EE bonds issued since December 1965 mature in 30 years, while those issued earlier mature in 40 years.
The advantage of an exchange is that it permits you to continue deferring the taxes on the accrued interest for the E and EE bonds. The disadvantage is that HH bonds pay taxable interest of only 1.5 percent, while E and EE bonds are earning 2.16 percent to more than 6 percent, depending on when they were issued.
The main question to ask when considering an exchange is whether the benefit of continued tax deferral would offset the lost interest.
The best candidates for exchange are E and EE bonds that are approaching their final maturities since taxes soon would be coming due. The newer the bond, the less sense an exchange makes. A 10-year-old EE bond offers another 20 years of tax deferral without an exchange.
Other points to consider: What is your tax bracket and will it be changing? If it is high but expected to decline, continued deferral is more valuable. If it is low, it may be smarter to cash the bond when it matures and reinvest the after-tax proceeds in something that pays more than 1.5 percent.
Go to www.treasurydirect.gov for savings bond information, including an earnings report you can use to find out what rate of interest your bonds currently are earning. Exchanges are handled by banks that sell savings bonds. The minimum exchange is $500.
Q. My bank is paying me 0.75 percent to 3 percent interest on my CDs and then lending money out at interest rates up to 7 percent. This disturbs me, particularly when I read that the bank CEO and upper employees are paid millions in salary. Shouldn't fair banking regulations require that banks pay their investors interest at least up to the rate of inflation if not a little above it?
That's a political question more than a financial one. What you are witnessing is capitalism in action. Banks set their rates for savers and borrowers based on market forces. They don't want to pay any more interest on CDs than it takes to attract the deposits they want. The bigger the spread between lending rates and savings rates, the more money the bank gets to keep. Bank shareholders would say that's a good thing.
You might try your idea out on your representatives in both Tallahassee and Washington since bank regulation is both a state and federal concern. In the meantime you always have the option of taking your money elsewhere. While rates are generally low, comparison shopping pays off.
Q. When students work part time, isn't it true that taxes are not taken from their paychecks since their annual salary does not require them to file a return? This is a matter of big discussion in our group.
Social Security and Medicare taxes are deducted, but income taxes do not have to be withheld if a worker had no income tax liability the prior year and expects none for the current year.
This is true for workers of any age, although the tax rules are less generous for young people who can be claimed as dependents on their parents' returns. They are exempt from withholding only if their wages will be less than $750 and investment income will be less than $250. Of course, some people choose to have taxes withheld as a way of forced savings. They then file a return to get a refund.
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- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to huntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.
