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How to Manage Paper Savings Bonds

A few weeks ago I wrote about discovering some old savings bonds in a safety deposit box.  Today I want to write about what to do if you run across paper savings bonds. 

Today’s Savings Bonds are Digital 

The Fed stopped issuing paper savings bonds only as recently as 2011.   Now if you were to purchase said bonds with outside funds they would come in electronic form via the Treasurydirect.gov  website.  The government made this change primarily because it was cheaper for them.  Also in theory it is easier to track.  A side note: You can still collect paper I-bonds, but only via your tax refund.  All other savings bonds must be issued electronically.

Recency of Paper Savings Bonds

Because of the recency, it is very likely many of us still have paper savings bonds somewhere.  They, after all, have 30 years until maturity.  Our found I and EE bonds were cut in the early 2000s for example, before the transition to digital.    The first thing to check is if your paper savings bonds are still accruing interest!  You see the problem to the user of a paper savings bond was they often matured once the holder forgot about them.  After maturity, they earn no interest, what a waste!

How to Know if You Have Paper Savings Bonds

Anyway, let’s start with how to know if you have savings bonds.    Provided you don’t stumble upon the paper forms the Treasury previously had a nifty tool to look up bonds by your social security number.  Unfortunately, that has now been discontinued.  If you believe you have lost or stolen bonds now you must fill out Form 1048 here with as much information as possible.   The government will find the bonds, although they will only reissue them to you in digital form.  This same page has information about how to correct incorrect information on a paper savings bond should you need it.

Now that you’ve found the bonds you need to determine if they have matured and their return.  You can determine this by using the bond valuation calculator. Simply enter the relevant bond information and it will spit out the maturity date, value, and return.  Then based on this information you need to decide what you will do with the bonds.  You have a few options.

How to Cash Out the Bond

Paper savings bonds are able to be cashed at most major banks.  Just bring ID.   The most obvious reason to cash a paper savings bond is the bond has matured.  In this case, the bond will no longer be accruing interest.   I would urge caution as to whether to cash any other savings bonds you might find.  The calculator above will tell you your return on the bond.

Why Not to Cash Out the Bond   

That being said the interest rates even as recently as the early 2000s were significantly higher than today.  What that means is you are unlikely to be able to cash out a savings bond and purchase a better returning new bond.  So if your asset allocation is balanced in a manner such that you need to acquire some bonds in your portfolio every year, you might be better served to treat the bonds as your bond purchase for the year and devote more new funds to stocks.  We are taking this approach with our new found wealth.

In addition, Savings Bonds defer their taxation until cash out or maturity, whichever comes first. So you should understand the tax ramifications of any savings bond cash out before taking action.

Load the bonds into Treasury Direct

If you choose to keep your bonds you have two choices, leave them as savings bonds or digitize them.  There are pluses and minuses to either approach.  To digitize the bonds and add to Treasury Direct the process is straight forward.  Create or login to an existing Treasury Direct Account.  Then click Manage Direct.  Check click convert my bonds.  Enter in all the bond information.  Treasury direct will spit out a shipping manifest with the bond information which you will need to sign.  Then mail the manifest and your bonds to the Treasury.  Simple as that.

Safety of Paper Bonds

I know one fear I had when I first read that was what happens if someone steals my bonds out of the mail?  Well, no worries.  First, you don’t sign the bonds just the manifest.  To cash a savings bond the person whose name is on the security has to sign it.    Second the forms I provided above for finding a bond will allow you to recover stolen bonds via the Treasury.  IE. There is no fear of lost or stolen savings bonds in shipment as long as you keep records of the bonds.

Anyway, after the Treasury processes the bonds they show up in your account… Quite Simple.  So should you load paper Savings Bonds into Treasury Direct?

Should you Load Paper Savings Bonds into Treasury Direct?

Well, Treasury Direct provides some significant benefits.  It tracks your bonds in one place if you have many. No more fear of lost or stolen bonds.    If they mature it’s easily noticeable which can help keep you from getting no return on matured bonds.  Finally, cashing bonds does not require you to take them to a bank, simply click a few buttons in your account.

Keeping Paper Savings Bonds

The other option is to keep your bonds in paper form until maturing.    The downsides are the opposite of the benefits of going digital.    But there are some surprising pros.  

For one if something were to happen to you and your financial paperwork is well organized its more likely your heirs would discover your paper bonds then know about your digital savings bonds on some website.  

Two, the Treasury guarantees paper bonds against theft.  However, if you do something to your Treasury Direct account to compromise security you are on your own.    Simply put the Paper bonds are in some ways more secure.

Three, some people just like the feel of a paper bond in their hands.

Which brings us to four, the Treasury Direct website sucks.  It’s one of the poorest web UIs I have seen.    If you forget your password or lock your account, you have to call in during normal business hours to get the account unlocked.    Actions and menu options are cryptically named.  It’s just bad!

So What Did I Decide To Do With Our Paper Savings Bonds?

I decided to keep our non-Matured Paper Savings Bonds in Paper.  We placed them in a new safety deposit box.  The reasons were mostly reason 4 with a little bit of 2.  I have purchased I-bonds more recently from the ones in this post.    I ultimately sold those recently purchased bonds because I could not stand the Treasury Direct Interface.  Also, I lived in constant fear that it was one more account that I might forget about.  So I primarily ditched TreasuryDirect in the past to simplify our money map.  Digitizing savings bonds would just complicate our map again unnecessarily for an account 15 years from now at maturity I wouldn’t remember how to log in.

Add to that most of our assets are digitized.  In some respects, I like the idea of having some assets in physical form in case of massive hacking or other issues.  It’s probably a false sense of security since a bank would need to process the bond digitally to cash it, but I still have that preference.  For that same reason, I keep printed out records of accounts updated fairly regularly.

Irreversible Conversion

The decision to convert paper savings bonds is obviously a deeply personal decision.  An important note, the conversion of savings bonds from Paper to Electronic is irreversible.  So if you do intend to make your bonds digital be sure that is the right path, as you cannot go back.  Conversely, I can always change my mind and make our bonds digital in the future.  

Do you hold paper savings bonds?

2 Comments

  1. Dan
    Dan August 28, 2019

    My father died in 2015. He left me over 200 individual Series EE and I Savings Bonds (paper versions). He bought these between 1989 and 2001. The oldest of these bonds are maturing next month. I never bothered to convert them over to digital. The bonds are in my father’s name and social security number. When I cash them, I will have to provide a death certificate. I’m hoping if I cash them at the same bank, I only need to provide the death certificate once and then it will be on file at the bank.

    “They, after all, typically have 30 years until maturity.”

    I wasn’t aware of any exceptions to the 30 year maturity rule for EE & I Savings Bonds.

    “Savings Bonds differ their taxation until cash out.” I think you meant “defer” not “differ.”

    Highlights of savings bond tax rules:

    1) As you mention, income taxes can be deferred until redemption or maturity (whichever comes first).
    2) W.r.t. #1, there is no economic incentive not cash out your bonds after they mature but even if you don’t the taxes are due in the year they mature. I’m not sure how the IRS would enforce that until after you redeem them. I have wondered if you could wait out the IRS but the opportunity cost is probably too much. Can you hold the EE bonds say 10 years past maturity? When you cash them out, there is no practical method to a) pay income taxes due 10 years ago or b) for the IRS to come after you for not reporting them 10 years ago. I suspect you would be required to pay the taxes in the year you cash them out. It’s unclear if penalties would be involved but in general, it is safer to not run afoul of the IRS.
    3) Savings bonds are exempt from state & local income taxes.
    4) You cannot get step-up cost basis treatment for savings bonds.

    In my case, I owe taxes on the entire 30 years of interest despite my father owning them for most of the 30 year period. Being his estate executor, I could have paid income taxes on the interest amount accrued at the time of his death. Then I would be responsible for the income taxes on the accrued interest after his death. I didn’t do this for a few reasons. It seemed too complicated. Also, I was the sole beneficiary so paying from his estate was exactly the same as reducing my inheritance. So, I decided the best taxes are deferred taxes. In hindsight, maybe it would have been better to pay the taxes because he was in a lower tax bracket when he died than I am today but the there was so much interest that it would have pushed him into a higher bracket. Actually, it would have bumped him up two brackets. If I paid from his estate, it would have been the taxes on his entire portfolio interest whereas now I can cash out the bonds as they mature so I can spread it out over 7 different calendar years.

    • FullTimeFinance
      FullTimeFinance August 28, 2019

      With electric savings bonds they automatically cash out at maturity. I suspect they won’t enforce the maturity taxation clause so long as you are not doing something funny like trying to hold for the college expenditure exclusion.

      Thanks for the feedback.

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