Tax Free Savings Bonds

Tax free savings bonds are a great way to save and grow your money.  Savings bonds may be a better alternative to a regular savings account because they offer a higher interest rate on your investment, and are as safe as a regular savings account.  The biggest difference is a savings bond has a maturity date and the funds are not available till the 5 year maturity date.  If the person needs to redeem the bond early there is a penalty, which will void out any interest you may have accumulated.

Savings bonds like all income have to be reported.  People who hold savings bonds, do not have to report any income till the bond is redeemed ( turned into cash).  If you hold a savings bond, and you have not collected any interest, or the bond has not reached maturity date, you can defer reporting the income.  However if you have cashed in a bond, invested in another, or transferred the bond to another person, you must report your interest that you have accumulated.  If you are in partnership on a bond, both you and your partner must report half the interest.  Tax laws change and you should always talk to a professional to ensure you are following  the tax laws accurately.

The primary way to save money on savings bonds is to defer reporting income annually.  If you have savings bonds that have no matured you do not have to report any income from the bonds.  However once they reach maturity you must report  the income over the entire period of the bond, not just for the last year. In essence you may have some tax savings for awhile but eventually you must report the income.

Many investors both professional and amateur are not aware of the tax laws regarding tax free savings bonds. Because bonds don’t mature for 5 years, they may even forget about them and fail to report the income  Savings bond  interest income is one of the most common mental mistakes, people make when it comes to reporting interest income.  If you think you may forget, you can report your interest yearly, even if you bond has not matured. Once you choose this potion, you must continue to do this every year.