Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, July 30, 1990 TAG: 9007280029
SECTION: BUSINESS PAGE: A/5 EDITION: METRO
SOURCE: MAG POFF BUSINESS WRITER
DATELINE: LENGTH: Medium
The government has also changed the method for buying the popular investment. The bonds now arrive in the mail.
Until this year, Congress acted periodically to extend the life of U.S. Savings bonds little by little. Holders never knew for sure when they had to be cashed in or converted into income bonds.
Under the new policy, Series E bonds issued through November 1965 have a life span of 40 years.
Newer Series E and Series EE bonds will collect interest over 30 years.
The Series H and HH income bonds are good for 30 and 20 years, respectively.
It's important to track the maturity dates of older bonds. Those purchased between 1941 and July 1950 have already expired. Some bonds reach maturity each month.
And the government stops paying interest on bonds that reach final maturity.
Worse, federal taxes are due immediately on the capital gain, which is currently treated as ordinary income. That means investors pay at their regular 15 percent or 28 percent income tax bracket. Bonds are not subject to state taxes.
The tax liability can be considerable. Those $25 bonds purchased for $18.75 in January 1949, for instance, topped out 40 years later with a value of $136.69. That's a gain of 629 percent.
There's a way to delay that tax bite if you act when old bonds mature.
Series E and Series EE bonds can be rolled over into HH bonds, which pay interest twice a year. Only the annual interest, not the gain, is subject to federal tax.
HH bonds are sold in $500 increments in a range of $500 to $10,000 in face value. By staggering purchases, you can arrange for payment of some income monthly.
Larry Harding, area manager for the U.S. Savings Bond program, recalled that the bonds once earned steady interest and reliably matured on specific dates.
When interest rates rose sharply in the 1960s, however, bonds could no longer compete with other investments. Sales rapidly declined.
By 1967, the government responded by issuing special bonds called Savings Notes or Freedom shares at slightly higher interest.
Finally Congress declared that all outstanding bonds would earn market interest, which means the rates change each May 1 and November 1.
The hooker is that bonds must be held at least five years to qualify, so U.S. Savings Bonds are an investment for the long term. Bonds can be redeemed after six months, but earn from 4.3 percent to 5.5 percent if they are kept for shorter periods.
The market rate is 85 percent of the average on five-year Treasuries for the prior half-year.
The current market rate is 7.01 percent. You can check it toll-free by calling 1-800-USBONDS (1-800-872-6637).
But bonds also come with a guaranteed minimum set at the time of sale.
Bonds issued today will never earn less than 6 percent, a rate at which the value would double in 12 years, but guarantees on bonds sold in the past have ranged up to a 9 percent minimum.
Redemption value is determined by averaging the market rates during the life of the bond, rounding to the nearest quarter-percent and compounding semi-annually.
It's impossible to tell what a specific bond is worth without a government chart. And nobody could be certain that Congress would keep extending maturity dates.
That problem, at least, has been solved with the enactment of firm dates for final maturity.
Harding said that bond sales in the Roanoke Valley have been running about $4.5 million a year. Sales for a six-month period through March were nearly $2.8 million.
That doesn't include bonds purchased through most payroll deduction plans.
Starting this month, all bonds sold in Virginia will be mailed from the Federal Reserve Bank in Richmond.
That means banks no longer have to keep an inventory of bonds, and all denominations are available. In the past, some banks kept only the most popular denominations.
Bank customers complete a bond order form and pay for the bonds. The bank forwards the order to the Federal Reserve, which mails the bond to the purchaser within three weeks.
Bonds will continue to earn interest from the first day of the month in which the payment is made regardless of when the order is processed.
People who order bonds as last-minute gifts can obtain a Treasury gift certificate.
by CNB