Cash those stinker bonds

Wednesday, April 12th, 2006
Categorized as: Stinker bonds

What happens if you simply hold a Savings Bond after it reaches final maturity?

Tom’s response

While there’s no rule that says you have to cash in a Savings Bond that has stopped earning interest – and a lot of people do hold on to these bonds – it’s such a bad idea I call them stinker bonds.

People seem to think that they can somehow avoid paying income tax on the interest the Savings Bonds have earned by doing this. That’s incorrect. There are only three possibilities:

  • you will pay the tax someday and keep the rest
  • your heirs will pay the tax someday and keep the rest
  • you will avoid the tax by letting the government keep the money forever and you and your heirs will get nothing at all

Moreover, the IRS says that tax is due on Savings Bond interest in either the year you cash the bond or the year it stops earning interest, whichever comes first.

So when you do cash the bond, the 1099-INT reporting the interest to the IRS can be issued in the year in which the bond stopped earning interest.

If so, you have to file an amended tax return for that year. You will owe not only the tax, but in addition you’ll owe a late payment penalty that is basically the interest you owe on the back taxes.

This stinks – instead of earning interest from the government on your Savings Bonds, you’re paying interest to the government.

The only thing to do with these bonds is cash them, pay the tax you owe, and reinvest in new Savings Bonds. You’ll be way ahead compared to folks who just hold on to them.

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FDIC Insured Certificates of Deposit can pay 1 or 2% more than savings bonds when held for a similar length of time. See top CD Rates Below:


On April 28th, 2008 Janice Hearns said:

I requested information on lost bonds which I purchased for my nephew in 1974. I sent all the details in my request. Which I sent request at Appx. April 5,2008. What should I do now.?

On April 29th, 2008 Tom Adams said:

Hi Janice – I would wait until mid-May at least before worrying about this. If you haven’t heard back by then, let me know.

Tom Adams

On July 1st, 2008 Edith said:

How long does it normally take to replace lost or stolen bonds?

On July 1st, 2008 Tom Adams said:

All – please ask questions about lost bonds on the page about lost bonds.

Edith – Normally you will hear from them after three weeks.

Tom Adams

On March 1st, 2010 Carrie said:

If a bond has been held beyond maturity and is no longer earning interest, what happens if it is given as a gift to a charity, and then the charity holds the bond until the donor dies? Are all taxes and penalties avoided and the charity entitled to the maturity value? Does the estate get a charitable tax deduction, too?

On March 2nd, 2010 Tom Adams said:

Carrie – Giving a Savings Bond with your name on it is meaningless – the charity can’t cash the bond. Only the person named on the bond can cash it!

If the donor dies, then the probate court will distribute the value of the bond among the owner’s heirs and the charity will get nothing. Possession of the bond is legally meaningless.

If you want to help out the charity and get a tax deduction, cash the bond, give the money to the charity, and take a charitable deduction on your tax return.

Meanwhile, holding a bond that isn’t paying interest is a free loan to the government. The government is the charity you’re supporting. If you followed your idea here, the most likely outcome is that the bond would never be cashed and in your eagerness to avoid taxes you’ll give 100% of the bond’s value to the government.

Tom Adams

Comments Closed

June 1, 2010

After six years, over 400 posts, 3,680 real comments, and over 90,000 spam comments (thank you, Akismet, for making managing a blog with comments possible), I am closing public comments on I will contine to update the main articles on this site, but not the comments.

Virtually every question about Savings Bonds has been asked and answered on this site multiple times. Use the search feature (see the box in the gray area near the top of this page) or the detailed menu on the lower part of the home page to find the information you're looking for. If you have a copy of Savings Bond Advisor, you can ask me a question here.

Tom Adams

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