I'm a realistic person. I realize that many people scoff at savings bonds as investment vehicles or think of them as something given to them by their grandparents for birthdays or holidays. However, I've been a long-time fan of savings bonds and have slowly accumulated them over the years. However, as I age, I begin to find myself planning on how and when to redeem these bonds and I have therefore developed a redemption strategy in an effort to maximize this investment.
Low income/low tax bracket periods
When I redeem my government savings bonds, I may be liable for paying federal income taxes on the interest earned on these investments. This is why I look for periods of time when I am earning less, and am therefore in a lower tax bracket, meaning that I can pay less on these earnings than I might when my income level is higher.
For example, right now as a self-employed individual, I'm making significantly less than I did when I worked in the hospitality industry. Therefore, I took advantage of this time to cash in many of my bonds, meaning that I can pay much less on these bonds than I would have when my income we higher. Retirement, when income is typically lower, is another possibility for a good time to exchange such bonds to reduce tax liability.
With over a decade to go until our kids start contemplating college, it's difficult to say whether or not they'll decide to go the educational route. However, if they do, we hope to be ready. Government savings bonds can be exempt from taxes should their proceeds be used for educational expenses. It is however important to note that there are certain restrictions and qualifications on whom the bond holder must be and what is considered a qualified tax exempt expense for educational purposes. For more information on these rules and requirements visit the Educational Planning page at the Treasury Direct website.
Boosting our emergency fund
Many people look at savings bonds as long-term investments; and yes, they certainly can be viewed as such. However, this doesn't have to be the only way savings bonds can be used in an investment portfolio. In fact, we tend to view such bonds as part of our emergency fund. As long as we hold them long enough to avoid the interest penalty for early redemption, we can cash these bonds whenever needed to bolster our emergency fund, yet leave them in place until then, earning a decent interest rate in the process.
I enjoy the flexibility that is built into this investment/saving option and have therefore used it over the years as part of our savings portfolio.
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The author is not a licensed financial or tax professional professional. The information provided in this article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.
- Personal Finance - Career & Education