It’s essential to understand the details and implications of owning matured savings bonds, particularly when it concerns penalties relating to non-redemption. The following article will shed light on these often-misunderstood concepts, and also highlight considerations that bondholders would be wise to bear in mind.
What is a Matured Savings Bond?
A matured savings bond is a U.S. government debt security that has reached the end of its interest earning life cycle. This typically occurs 30 years from the issue date. Once a bond has matured, it will accrue no further interest, meaning its value will remain static.
Repercussions of Not Cashing Matured Savings Bonds
While there is no outright penalty or legal consequence for not cashing in matured savings bonds, there are notable financial implications. The primary disincentive is quite simple – an opportunity cost. Matured bonds cease accruing interest. This means the money tied up in these bonds is effectively stagnant, doing nothing useful and not working for the bondholder’s benefit.
Unredeemed, matured savings bonds result in potential loss of earnings. The money could be in productive avenues such as stocks, property, or even investment in a business. For instance, consider the scenario of buying property with no deposit Sydney. Here, properly redeemed and invested savings bonds could have been utilised to establish a substantial mortgage down payment, or to subsidise living expenses in a city experiencing the brunt of the housing affordability crisis.
Tax Implications
Federal tax is due on the accrued interest of the bonds in the year of their maturity. However, many people deviate from this, with the Internal Revenue Service (IRS) being lenient on the issue. If the holder decides to defer tax payment on the interest accrued until redemption, the IRS treats the situation as a tacit consent to extend the payment of tax. Despite this, tax deferrals can lead to unexpected large tax bills once the bonds are cashed.
If the bondholder’s income is significantly larger the year they cash the bonds than the year of maturity, they may end up paying a higher amount than if they had paid the tax when the bonds matured. This is typical if the title to the bonds was transferred due to inheritance or gift.
Disposition of Matured Savings Bonds
Savings bonds never technically expire, which is a source of potential confusion. When the U.S. Department of Treasury announces that a bond series has matured, by this, they mean the bonds no longer earn interest. The Treasury Department still retains the bond records for long periods past the bond maturity and will honour claims for the face value at any time.
Bondholders are urged to redeem their matured bonds and reinvest the money into more profitable avenues. But, many holders choose to save them as historical keepsakes or fail to realise their bonds have matured.
Conclusion
The greatest penalty in not cashing matured saving bonds lies in the missed opportunities for your money to grow. A savings bond is a debt security intended to be an investment, a tool for further financial growth and security. Bondholders should aim to utilise their bonds to their fullest advantage, be it in embracing opportunities like buying property with no deposit Sydney or in simple, effective reinvestment strategies.