Every Christmas when I was a kid, Grandpa Paulie would give me a $50 EE savings bond. These pink slips of paper weren’t nearly as exciting as the new Barbie outfits and Nancy Drew books I unwrapped. Some (many) years later, however, the 4%-plus rates on those long-neglected pink papers have greater appeal.
As a modest bond-holder, I’m in good company. The Treasury Department estimates that more than $140 billion of savings bonds have been issued, with much of that in $25, $50 and $100 increments. Not all of these bonds enjoy the relatively high interest rates of decades-old EEs. All provide the same income deferral, however, with interest taxed only when the bonds mature, are redeemed or are transferred.
It’s that last option – transfer – that poses a trap for the unwary. Transferring (technically, re-registering) savings bonds triggers taxable income to the donor. In other words, if you were to contribute savings bonds to charity, you’d pay income tax at rates of up to 39.6% for the privilege of making that gift.
An exception to this unfortunate rule is transfers that take place upon death. By including a simple provision in your will or related estate-planning documents, your attorney can direct your U.S. savings bonds to a charity like the Community Foundation, which can then cash in the bonds free of tax.
Grandpa Paulie would be proud.