Is Now the Right Time to Cash in Your Savings Bonds?

Many people purchased savings bonds decades ago with the assumption that they were a safe investment to make. After all, the ability to increase your investment value over time while also mitigating risk sounds amazing. Some people even purchased bonds as a gift for a child or another relative. However, the growth on bonds is minimal in comparison to other types of investments you may be able to make. You may be wondering if the time has come to cash in your bonds for a small gain. By increasing your knowledge about bonds, you can better determine which option is most strategically advantageous for you to move forward with.

Should You Cash in Your Bonds?

Whether you purchased savings bonds or someone bought them for you as a gift, you may be curious about when to turn your bonds in for cash and how much they may be worth. There are several very convenient online calculators that you can use free of charge that can help you to analyze your bonds’ values now versus at a future time. Some of these online calcualtors will send you an alert via email or text when your bond value increases or decreases. Your ability to time the sale of your bonds and to turn them into cold, hard cash is critical if you want to maximize your return on investment.

What Do You Need to Know About Taxes?

The interest or growth on the value of your bonds is taxable. You can elect to pay the tax as interest accrues on the bonds each year. However, many people fail to make this election, and this means that you will pay the full amount of taxes due in the year you sell the bond for a gain. Only a federal income tax applies to this type of financial gain, and this is beneficial if you live in a state that has a state income tax. You may consider timing the sale of your bonds to control your taxable income for any given year. Consider, for example, that your tax bracket dictates how much money a senior citizen pays for Medicare Part B health coverage. If you break the sale of your various bonds up across two calendar years, you may be able to qualify for a lower Medicare rate in some cases.

How Do You Know Which Bonds to Cash In?

One of the most common questions investors have about their U.S. savings bonds relates to the timing that is most ideal for cashing them in. All bonds have a maturity date written on them, but you may think that holding onto an older bond will result in more interest accruing. After all, if you do not necessarily need the money right now, why would you trade the bond in? Bonds typically have a full maturity date, and they will not increase in value beyond that date. Even if you sit on the bond for another five or ten years past the maturity date, it will never increase in value over this period of time. The effects of inflation will actually take their toll, and the overall value of the bond to you can decline during this period of time. It is usually best to trade bonds in for cash as soon as the maturity date is reached. You can then reinvest the money in other assets for continued growth. The exception here is if you are trying to mitigate your tax burden. If this is the case, delaying the sale for only a year or two may be financially wise. You may be thinking about trading in a bond before the maturity date. If you have a fixed interest rate bond in a rising interest rate environment, this may be wise. However, use an online calculator to estimate all scenarios possible before taking action.

Because savings bonds have only a nominal return, they are usually only purchased by savvy investors who need to mitigate the risk in their portfolio. Whether you are thinking about buying bonds today or you have bonds that you may be able to cash in for a profit, analyze all scenarios possible to determine your best course of action available.

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