Inheriting Savings Bonds and the Tax Implications

0:00 Ralph: Have you recently inherited savings bonds from a loved one. And you're wondering what to do next. Are you concerned about the possible tax implications? You're not alone. Join me, as we navigate the ins and outs of inheriting savings bonds, and we're going to explore how to honor your loved one's legacy while stewarding this inheritance wisely. So stay tuned for a great show.

0:50 Welcome to our financial Friday show. I'm so glad you chose to join us. I just want to thank you for listening and supporting this program. I'm coming to you from the Estep Farm in the Saggio Accounting studio today. Let me put on my podcaster hat and put down the overalls and the adding machine. And let's get into some financial wisdom from a Christian perspective. And don't forget to subscribe to the show and join our email list. You do that at askralphpodcast.com . So you don't miss tomorrow's show. When we're going to discuss the pros and cons of credit builder loans, you might not even know what they are, but tomorrow we're going to talk about that. So let's start with today's Bible verse. Before we dive in, let's take a moment to reflect on this first from Proverbs chapter 13, verse 22, and it says this.

1:31 A good man leaves an inheritance to his children's children. Boy, that's a lot to think about. When a loved one, entrust us with inheritances like savings bonds. It's both a blessing and a responsibility. Today, lets unpack what you do when you inherit savings, bonds, and the important tax considerations to keep in mind. This is some complicated stuff, folks. First off what exactly are savings bonds? A lot of people don't know what they are, what they are. Is there a type of debt security issued by the us department of treasury to help pay for the government's borrowing needs? And if you're like me, you're seeing a ton of that going on as our government continued to spend without any avail or concern. When you buy a bond, you're essentially loaning money to the government.

2:12 You're the lender. Which they promise to pay back with interest over a set period of time. Now many people invest in savings bonds because they're safe. They're low risk investments backed by the full faith and credit of the us government. That's sort of what the draw is. Folks. People believe that they're safe, low risk because they're Backed up by the us government. So what happens when you've inherited savings bonds? Now, what. So here are some key steps to take. Number one first thing you need to do. You need to identify the type of savings bonds. Before I did this episode, I wasn't even aware of all this. There are several different series of savings bonds each with their own unique features and rules. The most common ones you may inherit are what called series EE and series I bonds.

2:56 So let's start with series EE series EE bonds are the most common and earn a fixed rate of interest for up to 30 years. So the interest rate is fixed. For a term up to 30 years. I bonds on the other hand, earn a combination of a fixed rate and an inflation rate. Making them a popular hedge against inflation. So what am I saying there? Basically what I'm saying is they give you an interest rate, but that interest rate is indexed. As inflation goes up, the amount of interest you're paying goes up. And knowing the bond series is crucial for understanding its maturity. The interest rate and the tax treatment. So that's the first thing. Number two thing you want to do determine a Bond's current value maturity. The next step is figuring out the current value of the inherited bonds and whether they fully matured yet savings bonds typically stop earning interest at their final maturity, which is usually between 30 and 40 years after issuance, depending upon the series.

3:49 So at some point, if you inherited these bonds and they've already reached their maturity, they're not gaining any additional interest. So you might ask Ralph how do I find out about their value? Here's the deal. You can look up the bonds issue, date. And calculate its maturity. There's online tools available at treasurydirect.Gov that lets you input the bond's serial number and the denomination to get its current values. You can go right to that. Treasury direct.gov put in the bond serial number. And the amount of the denomination it'll give you its current value. So once you've done those two things, you've identified what kind of bonds they are and their value. The third step is you've got to decide whether to cash out or keep the bonds. This is one of the biggest decisions.

4:29 It's whether to cash in the inherited bonds now, or keep them until maturity. If they've not already matured. This really depends on your current financial needs and goals. That's really what we're talking about here. Folks, If the bonds are no longer earning interest and you have high interest debt to pay off or an important financial goal, cashing them out to put those funds to work may make sense to you, especially if they're not earning any additional interest. It's just a dead investment at that point. Now on the flip side, if the bonds are still earning interest and you don't have a pressing need for the money. You could hold on to them and let the interest rate keep accruing. But again, you've got to look at what is the interest rate that that's paying. Versus what you can get in the market. So what do I say here spend some time in prayer and wise counsel to determine the best approach for your situation.

5:12 So once you've done those three things, the next thing you do is understand the bonds tax treatment. So let's talk taxes. Everybody's favorite topic. One of the most common questions around inheriting savings? Bonds is what are the tax implications? I get this question quite a bit. The good news is that inheritance itself is not considered taxable income at the federal level. So just getting those bonds. By inheritance doesn't trigger a tax event. However, this is the important part. The interest earned on the bonds is taxable income. Now here's where it gets a little more complicated, depending upon elections made by the original bond holder. That was the person who originally had it person you inherited from that interest may be taxable in the year.

5:54 It was earned. Or the year in which it's redeemed or matures, this is where things get a bit tricky folks. If the decedent that's, the person who passed away, had been reporting the interest annually on their tax return. Then you, as you inheritor fancy word for the person who got the bonds only need to report interest earned after the date of death. So in other words, if they've been reporting the interest every year as they go, the only interest you're going to have to report and pay taxes on is whatever interest was earned after they passed away. Now here's the catch. However, if the decedent and use the cash basis, method of accounting, which basically means they show the income when they received the cash. And deferred that reporting interest until the bonds are cashed in, then you may be responsible paying income tax on all of the interest earned from the time the, a bond was originally issued up to when you cash them in or when they mature.

6:44 Even if most of the interest accrued during the decedent's lifetime. So what am I saying there? Here's a great example. Let's say your loved one bought a $10,000 bond that is worth $20,000 in 30 years. If they made the election on the cash basis to only report that interest, when they cash in the bond, Then you're going to have to pay tax on the earnings of that whole $10,000. So it started 10, it reached 20, the earnings are 10,000. So you're going to pay tax on all 10,000 as compared to if they reported the interest on an annual basis, they've already paid interest on all of those earnings up to the time of death. This is known as the income in respect of a decedent. It's a fancy way of saying it.

7:24 And there are some provisions to try to help ease the potential tax burden. Like a deduction for any estate taxes paid on that income. So if that is the situation, you can take a deduction for any estate taxes paid on that income. But that's where you need to invest some time with a professional. The other factor is whether any of the bonds are eligible for the education tax exclusion. If bonds are purchased after 1989, by someone age 24 or older, interest may be tax-free. If the bond is used for the owner, their spouses, or the dependents qualified higher education expenses. But here's the thing, folks, there are some strict income limits and other requirements to qualify. So that's why I always say my recommendation will be to sit down with a qualified tax professional, like myself Or a financial advisor to walk you through specific situation and create a customized plan for managing the tax impacts of your inherited bonds.

8:12 Don't let the complexity deter you though. With some practical planning, you can minimize the tax hit. Hey, that's what we all want to do. And maximize the blessings of this inheritance. And number five, consider your bonds role in your overall financial plan. This is the key folks. You gotta lastly, take some time to consider how this inheritance fits into your bigger financial picture. What are your financial plans? What are your goals and dreams? What has God laid on your heart? Any inheritance, like this could be the seed money to finally get out of debt. It could do. Wonders to start that business you feel called to, You could save it for your children's education or you could increase your generosity and impact for God's kingdom. On the other hand, you may decide the most prudent thing is to reinvest the funds for your longterm future.

8:56 Perhaps rolling the inheritance into a diversified portfolio, align with your goals and values either way. You need to speak to someone who can help you. The important thing is being intentional. And seeking God's wisdom each step of the way. Now, before we wrap up I want to remind, all of our listeners visit our podcast page, do that at askralphpodcast.com there you can leave a review, share your thoughts, or even send us a message with questions for future episodes. We are building our calendar for the next few weeks. So if you've got an idea that you want to talk about, Please send me an email or go to our website and record a message while you're there. Make sure you join our email list that we can send you our daily email to let you know what's going on on the show. And if you find you have a specific financial concern, you can also schedule a consultation.

9:39 They right there from the website. And here's the thing I want you to do. If you know someone who's inherited savings bonds, or has questions about them, please share this episode with them. And I hope that you're getting value from our podcasts in general. So please share the podcast with them as well. In summary, if you've inherited savings, bonds, here's what you want to do. Number one, identify the bond series and the maturity number two look up its current value. Number three, decide whether to cash in or keep the bonds. number four, understand potential tax implications and number five, make a plan for how to best use the inheritance. The truth is folks by following these steps and committing the process to prayer. You can honor your loved one and steward their gift wisely. That's all for now, folks.

10:20 I hope this episode has brought you some clarity and practical next steps. If you find yourself inheriting savings bonds as always. Reach out to a trusted tax or financial professional to discuss your specific situation. If you found this info helpful, again, hop over to our askralphpodcast.com for more episodes and resources on honoring God with your finances. Remember this? And inheritance is a gift and an opportunity to create a legacy of stewardship. And generosity. I love how Proverbs chapter 20 verse 21 in the message translation puts it. Quick wealth is not a blessing in the end. An inheritance like savings, bonds doesn't have to burn a hole in your pocket. prayerfully consider how God may want you to use it for his purposes.

11:02 Well, thanks for tuning in stay financially savvy, my friends and God bless you and have a great weekend.