Dear Dr. Don,
I have about 110 U.S. savings bonds that I would like to cash in. I plan to use the money to buy a larger bond and want the transaction to be tax-exempt.
– Arthur Aggregate
Dear Arthur,
In the past, the Treasury let owners of savings bonds use the proceeds from redeeming savings bonds to buy Series HH/H savings bonds. This allowed investors to accomplish the twin goals of tax deferral and bond consolidation.
However, the Treasury stopped selling Series HH savings bonds (which were first issued in January 1980 and replaced Series H savings bonds) at the end of August 2004.
While you can’t consolidate your savings bonds into one big bond, you can convert the bonds to electronic form at the TreasuryDirect Web site by using the SmartExchange service. That would make it much easier to manage such a large savings bond portfolio. Because you’re not redeeming the savings bonds, you could continue to defer paying federal income tax on the interest earnings until a bond is redeemed or matures.
Deferring the taxes on savings bonds’ interest earnings doesn’t always make sense. If you’ve been deferring taxes, you can choose to switch from cash basis reporting to accrual basis reporting. However, you have to do it for all of your savings bonds.
Learn more about the taxation of savings bonds on the TreasuryDirect Web page “Series EE/E Savings Bonds Tax Considerations.” (In July 1980, Series EE savings bonds replaced Series E savings bonds.)
Talk to your tax professional if you’re uncertain about which course to take.
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