Cash those 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.