Posted on: Thursday, February 26, 2004

Treasury will stop issuing

By Albert B. Crenshaw
Washington Post

WASHINGTON — The Treasury Department has announced that it is taking away a very nice tax benefit that has long been allowed to holders of Series E and EE U.S. Savings Bonds — the ability to roll them over at maturity into Series HH bonds and defer taxes on the interest built up in the E/EE bonds.

At the end of August, the department said, it will cease issuing new HH bonds. Current holders of E and EE bonds will have until then to convert them; after that, E/EE bond holders will have to cash them in when they mature or sit on them and earn no additional interest.

Bondholders who decide to convert while they still can, however, will find that doing so carries a cost of its own. EE bonds are earning 2.61 percent, while HH bonds pay 1.5 percent. Converting a bond that has many years to run means giving up the higher interest for the E/EE bond's remaining years.

HH bonds pay out their interest twice a year, so offer no tax deferral. So, the change doesn't sit well with some E/EE bond holders.

"I'm taking a big (income) loss but saving a big tax" hit, said Jack Landis of Chevy Chase, Md., who is switching to HH bonds.

The Treasury apparently thinks HH bonds won't be missed.

"Funds invested in Series HH bonds do not represent a significant portion of all the funds invested in savings bonds, but do result in a substantial administrative expense for handling exchanges. As it moves toward a paperless savings bond program, Treasury decided to stop issuing Series HH bonds, rather than develop a paperless version," the Bureau of Public Debt said on its Web site, www.public debt.treas.gov.

HH bonds account for only about $13.8 billion out of a total savings bond market of $204 billion, according to a bureau spokesman. About 600,000 people hold them.

Existing HH bonds — the bonds have a 20-year term — will continue to earn interest as scheduled, as will those issued between now and the deadline, the bureau said. Also, HH bonds that mature between now and Aug. 31 can be renewed.

To be eligible for exchange, E/EE bonds must be at least 12 months old, meaning that owners of bonds bought in the first part of 2003 may have to wait, and those bought after last August won't be eligible, period. Also, E/EE bonds must be no more than one year past their final maturity date — which was 40 years from issue for E bonds issued through November 1965, and 30 years for E and EE bonds issued in December 1965 and since. Finally, an owner has to have E/EE bonds worth at least $500, which is the smallest HH bond denomination.

To make an exchange, E/EE bond holders need to file form PD F 3253, "Exchange Application for U.S. Savings Bonds of Series HH." That can be done anytime, but to beat the deadline it must be completed, properly signed and certified by a qualified savings bond agent — typically a bank — for forwarding to a savings bond processing site by close of business on Aug. 31, the Bureau of Public Debt said.