Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, July 3, 1995 TAG: 9507030002
SECTION: BUSINESS PAGE: A12 EDITION: METRO
SOURCE: MAG POFF
DATELINE: LENGTH: Medium
A: The change in U.S. Savings Bonds, which took effect with bonds purchased May 1 and later, was included in the General Agreement on Tariffs and Trade bill. It is among the measures designed to raise money to offset some losses expected through GATT.
What the government did was to drop its guaranteed minimum interest rate, then set at 4 percent. That minimum had exceeded the rate paid on other insured deposits for some time, although the gap had narrowed. Even so, bonds held five or more years have been earning more than the 4 percent in market rates. Bonds purchased in the past had a floor below which the market rates could not fall.
Bonds purchased since May don't have this floor, so they will earn straight market interest. You cannot predict the maturity date, when the bond will double to face value, because the interest rate changes every six months. The bond will keep earning interest beyond that point, reaching so-called final maturity in 30 years, after which the interest stops and taxes come due unless the EE bonds are rolled over into HH series bonds.
In another change approved with the same bill, interest will be posted every six months instead of monthly. That means you could lose some interest if you cash in the bond any time except just after interest is added.
Finally, for the first five years, interest will be based on a lower index than in the past. The interest is the same as it has always been for bonds held more than five years.
Payoff hinges on financial situation
Q: My husband is going to retire within 10 years. We have a house, and I own an apartment in Maryland. Would we be better off if we pay off the apartment in 10 years by increasing payments, or would we be better off leaving it to be paid off in 15 years? It's a second home. We cannot sell the home because of capital gains tax.
A: Your course of action depends on your financial situation. Michael Hincker, head of the Roanoke office of National City Mortgage Co., said that generally speaking it's a good move to pay off any debt if you can afford it. This depends on the interest rate on the apartment, your income tax bracket, your need for tax deductions and the amount of other investments that you have. Would paying off the mortgage more rapidly strap you financially? If you have other savings for retirement and you can afford the payment, it makes sense to pay off a loan that costs more in interest than you could earn in interest on an alternate investment.
Bonds, tax-free interest for higher education
Q: I have been purchasing U.S. Savings Bonds for seven years through payroll deduction. How can the interest be made tax-free for higher education expenses? When I first got into buying these bonds, it was advertised that you could use all this money for tuition costs and it wouldn't cost anything. I've heard other places that you've got to have household income of $60,000 or less. I am now considering putting that money into a mutual fund instead of buying bonds, because I only have a limited amount of money to invest. What does it take to qualify for tax-free earnings for tuition costs?
A: In the first place, only bonds purchased in January 1990 and later can be used to pay tuition expenses and matriculation fees (not room and board or textbooks) for higher education. If you started buying bonds seven years ago, your early bonds do not qualify for this tax break.
The ability to win a waiver of taxes for this purpose does, indeed, depend on your income. Larry Harding, Roanoke area representative for U.S. Savings Bonds, said the 1995 limit for the full tax benefit is $63,450 in adjusted gross income for a married couple filing jointly. Partial benefits are available in increments up to a household income of $93,450, at which point they disappear. This income is adjusted every year for changes in the cost-of-living index.
Whether you should invest in bonds or mutual funds depends on the age of your children. If they are within a year or two of college, invest in the bonds, because the market could drop. But if you have a long time - five or more years - to ride out downturns in the market, you should choose the growth potential of a mutual fund.
by CNB