Savings Bond Alert #002

New Series EE rates on older bonds range from 2.57% to 6.00%

The U.S. Treasury has announced that rates for older Series EE Savings Bonds as they enter their next rate period will range from 2.57% to 6.00%. This compares to the 2.84% rate announced Monday for new Savings Bonds.

The number of issue dates paying the 6% rate declined from 10 issues to 4 issues. This year, bonds that were issued in 1992 are moving into a new maturity period, which allows the Treasury to adjust the guaranteed rate on these bonds to the current 4%. After the next announcement, there won’t be any Series EE bonds left that pay the 6% rate.

Of the 292 active issues dates through April 04, 46% will earn 4% interest during their next rate period. 29% will earn the announced 2.84% rate.

22% of the active issue dates will earn less than the announced 2.84% rate; these older bonds are candidates for redemption and reinvestment in new Savings Bonds. You can check the new interest rates for your bonds on our web site.

If you’d like to trade in older, low-rate bonds for new ones, be sure you don’t pay a hidden interest-rate penalty and that you avoid the deferred-tax time bomb.

New Series I rates on older bonds range from 3.49% to 6.02%

Rates for older Series I bonds will range from 3.49% to 6.02%, compared to the 3.39% announced for new bonds on Monday. The new bonds pay the lowest fixed base-rate ever, which gives them the lowest rate for any Series I bonds.

You can look up the new rates for your Series I bonds on our web site.

Questions from readers: Time to convert Series E/EE to Series HH?

Question: I have quite a few Savings Bonds that have about ten years to go before reaching final maturity. At what tax bracket would it make more sense for me to convert these bonds to Series HH bonds in August 2004 while it is still possible? I am interested in having some control with tax deferral - how much should I give up to do this?

Answer: No matter when you cash them in, plan on spreading the redemptions over several years, so that you don’t have to pay tax on a large lump of interest income all in one year.

You’ll have to pay the tax eventually. Right now, depending on your income, you’d pay at least 10% at the low end or up to 35% of your interest income back to the Treasury as income taxes.

Since the bonds will pay interest for another 10 years, if your tax bracket will be on the low end five to ten years from now, keep the bonds you have and redeem them or roll them into new bonds then.

Likewise, if your tax bracket isn’t going down until more than 20 years from now, moving into HH bonds this year won’t help you, since HH bonds mature in 20 years. You’d be better off gradually selling the bonds you have, paying the tax, and buying new Savings Bonds. Depending on the bonds you have, new bonds may pay a better interest rate anyhow.

So the only situation where HH bonds even begin to make sense for you is if your tax bracket will be lower than it is now more than ten years but less than 20 years from now.

In that situation, however, you’d be locking in today’s 1.5% HH bond rate for 10 to 20 years. If you feel, as I do, that interest rates have no where to go but up, you should earn at least twice as much by sticking with Series EE or Series I bonds.

For example, if the HH bonds earned $1,000 and you paid just 10% in taxes you’d have $900. If EE bonds over the same time period earned $2,000, but as a consequence you had to pay 35% in taxes, you’d still keep much more - $1,300.

I think the only case where switching to HH bonds makes sense if you have a large amount of bonds maturing in the next year or two and you want to spread redemptions out over a longer time period than that. Converting to HH can give folks some breathing room to do that. Otherwise, 1.5% is just too low.