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Series E 2010 Bonds

In 2010, the last issue of iconic Series E US Savings bonds will mature. In June of 1980, the Treasury replaced Series E bonds with Series EE bonds. Investors who still own Series E bonds probably forgot about bonds they bought 30 years ago (or were gifted in the meantime) and may face a rude awakening upon redemption. A principal motive for investing in US savings bonds, for most investors, was the tax shelter aspect of the tax-free accrual of interest income until maturity. These bonds, purchased at 75% of the redemption value, did not pay interest each year, though they accrued interest at 4.00%. If you held the US Savings 2010 Series E to maturity, the tax rules operate to add all untaxed accrued interest  to the redemption value of the bond. So, if you own the $10,000 denominated bond, purchased thirty years ago for $7,500, the bond, which was accruing 4.00% for thirty years, accrued $35,880 of interest and will be redeemed for $43,380 (in case of April 2010 final maturity bonds).  The entire amount of accrued and untaxed interest of $35,880 will become taxable in 2010. The accrued interest income on these bonds is taxed at ordinary tax rates. The Treasury estimates that approximately $16.7 billion of US Savings bonds still linger around under mattresses and in safe deposit boxes. While these bonds can still be redeemed, they are not earning interest past their maturity date. So check the maturity date on your long forgotten US Series E bond and see if it makes sense to redeem them this year. If you anticipate to be in a lower tax bracket next year, it may be worth while to wait and redeem your bond in 2011.

Disclosure: No position