mulberry purse Conversion to HH bonds must be done
The government is eliminating HH bonds as a cost saving measure, said Stephen Meyerhardt, spokesman for the federal Treasury Department’s Bureau of Public Debt. (Only about 600,000 people own a total of $14.2 billion of these instruments. There are 55 million people holding $205 billion worth of savings bonds.)
In fiscal 2003, about $1.2 billion flowed into HH bonds, Meyerhardt said. But since the bonds’ elimination was announced in February, savings bond investors have converted about $800 million.
“If you were thinking of converting to HH bonds in the next three to five years, take a good hard look this month or you’ll miss it,” said Dan Pederson, president of The Savings Bond Informer, a consulting service in Detroit.
When they debuted in 1952, H bonds (the predecessor to HH bonds, which were first issued in 1980) were conceived as a way for retirees to draw an income from their savings bonds holdings. Unlike other types of savings bonds, in which you don’t get the income or pay the taxes on it until the bond is cashed in, HH bonds pay taxable interest twice a year for up to 20 years.
You can’t buy an HH bond. You can only convert E or EE bonds that you’ve held for one year and that are worth in total at least $500. HH bonds became a lot less attractive 18 months ago, when the government lowered the interest rate paid to 1.5 percent from 4 percent. But they are still a powerful tax savings device, especially for those nearing retirement who want to defer paying tax on the accrued interest until they hit a lower tax bracket. But he found the interest rate distastefully low.
“The only advantage was to defer taxes on the interest on my E bonds,” said Feuer, 78, a retired dentist who does not plan to convert any more bonds before the Aug. 31 deadline.
Don’t rush to convert: HH bonds aren’t right for everyone, experts said.
While the decision depends on your financial and tax situation, generally only those who have E or EE bonds expiring in the next three years should consider shifting them to HH bonds, said William Massey, senior tax analyst at RIA, a tax information and software provider based in Manhattan.
If you convert, you can delay declaring the accrued interest, which could be very helpful if you think you’ll soon retire and be in a lower tax bracket. Also, cashing in a large amount of savings bonds at one time could push you into a higher tax bracket or make it more difficult to claim a medical deduction (which is based on income).
Since his bonds will expire in the next few years, Mark Pachenker plans to rush to convert this month so he can continue to defer the taxes. But he’s upset that the government cut the rate to a mere 1.5 percent and that it is eliminating the HH bond, forcing him to convert earlier than he would like.
But those with E or EE bonds that don’t expire for a while will forgo higher interest rates if they convert, Pederson said, and that may not be the best thing to do. Most EE bonds issued after May 1995 are paying 2.84 percent (until the rate is adjusted on Nov. 1), while older bonds may be paying as much as 4 percent. “You’ll be giving up 2.5 percent,” he said. “It wouldn’t make sense to give up the interest.”