SITTING ON OLD SAVINGS BONDS? HERE'S WHAT I DID WITH MINE
By ELLEN STARK

(MONEY Magazine) – THIS MONTH: --New automated loan machines let you borrow in just 10 minutes. --Who should use tax-saving credit cards that tap a home-equity line

SIXTEEN YEARS AGO THIS JUNE, MY AUNT PAT and Uncle Jim gave me a time-honored high school graduation gift: a $50 U.S. Series EE savings bond. Since then the bond has drifted from nightstand drawer to moving box and back again, quietly gathering dust (and interest). I should have paid closer attention to the bond--I earn a living writing about personal finance, for crying out loud--but I freely admit that until two months ago, I completely neglected this small corner of my finances. I had no idea what the bond was worth. Nor did I know whether it was still earning interest and, if so, at what rate. So for all I knew, I might be missing out on a much better investing opportunity through my neglect.

I have a feeling I'm not alone. Some 55 million Americans, or 21% of the population, own at least one savings bond--and 7.1 million of those uncashed bonds have stopped earning interest. Backed by the full faith and credit of the U.S. Government, savings bonds sell for half their face value and accrue interest to reach the face amount in about 10 to 17 years, going on to earn interest for a full 30 years. But when I set out to assess my bond recently, I found that while a savings bond may seem simple, getting complete, accurate information about it is anything but.

Finding out how much my 16-year-old bond was worth was the easy part. Most banks keep a copy of tables issued by the Treasury Department of savings bond redemption values. Sure enough, after just a few seconds at my local bank branch, a teller told me that my $50 bond was now worth $84.66--which works out to an impressive average annual return of about 8%.

As a skeptical reporter, however, I triple-checked. Not only did I log on to the Federal Reserve Bank of New York's Internet site to use its free redemption-value calculator (http://www.ny.frb.org; see Money Newsline on page 18 for more information), but I also called the Savings Bond Operations Office in Parkersburg, W.V. (304-480-6112), where a consultant was happy to tell me my bond's current worth. Yep: $84.66.

The next question was trickier: Should I hang on to the bond or cash it in? To figure that out, I needed to know what rate the bond is paying now. "Unfortunately," says Daniel Pederson, author of U.S. Savings Bonds: A Comprehensive Guide for Bond Owners and Financial Professionals (TSBI Publishing, $24.95), "a bond's current interest rate can be extremely difficult to determine."

No kidding. After grilling Pederson, a former Federal Reserve Bank savings bond official, for nearly an hour, here's what I learned. Until May 1995, when the government revamped its system, all savings bonds carried a variable rate based on Treasury yields, with a guaranteed minimum rate. The government reset the guaranteed minimum on newly issued bonds every few years. Nowadays, however, new bonds have no interest-rate floors: They pay only variable rates. Those rates are adjusted each May 1 and Nov. 1 (recent rates: 4.75% for bonds held five years or less and 5.16% for bonds held longer). Bonds issued before last May, like mine, earn their guaranteed minimum or the market rate, whichever is higher.

Wait--there's more. Before May 1995, the initial guaranteed rate for the older bonds applied only until the bond reached original maturity (face value)--in my case, for the first 11 years. At that point, investors got a second guaranteed rate for another 10 years, based on the then current guaranteed rate on bonds being issued at that time. Still with me? For example, my bond began with a 8.86% guaranteed rate in 1980. In June 1991, that minimum rate dropped to 6%, where it'll stay until 2001. After that, the guaranteed rate will change again, though it cannot be less than the 4% minimum required by law for all old bonds.

Without Pederson's expertise, I would have had trouble. For instance, when I asked my bank teller for the current interest rate on my bond, she said: "I'm not sure. Maybe 4%." She did hand me a free 12-page brochure from the Treasury Department called U.S. Savings Bonds: Investor Information. Unfortunately, it focuses solely on how market rates are calculated today, but it does say to write to the Savings Bonds Marketing Office for a free copy of the Semiannual Interest Rate Bulletin. That document gave me my bond's correct current interest rate of 6%. Problem is, it didn't spell out that the rate wouldn't last forever.

What about just calling the Treasury Department's toll-free savings bond information line (800-4US-BOND), which I got out of the Treasury's brochure? Forget it. All I heard was an unhelpful recording. A much better bet is the Treasury's non-toll-free savings bond number--the same one I'd called to double-check the value of my bond. After several minutes of wading through a menu of voice-mail options and waiting on hold, I reached a courteous and knowledgeable consultant who looked up the correct interest rate and read it to me over the phone. Moreover, she explained that the 6% minimum rate would change again in 2001. Bingo!

A word of warning: If you own three or more different bonds, the phone consultants may not take the time to go through all the rates with you. So with several bonds, you're better off paying an independent firm for the full scoop. Two such outfits, the Savings Bond Informer (800-927-1901) and the U.S. Savings Bond Consultant (800-717-BOND), will calculate redemption values, current interest rates and the dates of future interest-rate changes for all your bonds. Fees range from $12 for one to 10 bonds to $50 for as many as 500 bonds.

Despite all my newfound knowledge, I still had to factor in one more thing: taxes. For the past 16 years, I haven't paid a penny on my bond's $59.66 in earnings. (While the law gives you the option of paying taxes on the estimated annual interest, most people, like me, just pay when they cash out.) The interest is also free from state and local taxes, a plus for me, a resident of high-tax New York State. If I wait to sell my bond until it reaches its final 30-year maturity, and therefore stops paying interest in June 2010, I can put off paying taxes and continue to earn interest on the full amount. Sell it now, and I'll owe $16.70 in taxes because I'm in the 28% bracket.

The drawback of delaying that tax bite, of course, is that barring a major Forbesian tax overhaul, my bracket figures to rise as my income increases (editors: Please note this thinly disguised plea for a raise). What about giving the bond away to avoid taxes? In 14 years, my six-year-old goddaughter, Claire, might be thrilled to get that money to squander at college. No go, says Arthur Bloom, a New York City accountant. If I give my savings bond to her or even to charity, he says, I will still owe taxes on what it has earned, because it's deferred income, not a capital gain. Talk about kicking a gift horse in the mouth!

Lafayette, Calif. tax and financial planner Lynn Ballou gave me great advice: Focus on my investment goals and time frame. At my age, 33, I should keep my long-term investments in stocks, not in a cash equivalent yielding 6%. If I earn the historical 10% average annual return for stocks, I'll make up what I'll pay in taxes ($16.70) in five years. "Move on, Ellen," Ballou said sagely.

So I did just that. I went back to my bank, where the teller stamped the bond and immediately deposited the $84.66 into my checking account. Thanks, Aunt Pat and Uncle Jim. Sixteen years later, my bond turned out to be an excellent educational gift.