Originally created 01/24/02

Saving bonds can reduce your taxes



Q: I heard that the government was going to issue "war bonds" to help in the fight against terrorism. Has that happened, and where can I get them?

A: After the Sept. 11 attacks on the World Trade Center and the Pentagon, members of Congress introduced legislation urging creation of a new bond - to be called variously a war bond, a unity bond or a patriot bond - to support American anti-terrorism efforts.

It was an idea that harked back to World War II when, following the attack on Pearl Harbor, the then-issued Series E Savings Bond was renamed the "War Savings Bond."

What the U.S. Treasury has been doing since Dec. 11 is to issue its current Series EE bonds with the words "Patriot Bond" printed just to the left of the issue date.

The bonds sell at half their face value and are available in denominations of $50 to $10,000, said Peter Hollenbach of the Treasury's Bureau of the Public Debt.

The special bonds are on sale at banks and other financial institutions as well as at the government Web site, www.savingsbonds.gov. Patriot Bonds are not available through company payroll savings plans, however.

Hollenbach says the public should know that money invested in a Patriot Bond does not go into a special government account but, like other bond proceeds, into the general Treasury.

"This was true with the money raised in World War II," he added.

Still, there are good reasons to consider Patriot Bonds.

Daniel J. Pederson, author of "Savings Bonds: When to Hold, When to Fold and Everything In-Between," points out that they're paying a good rate now - 4.07 percent - which is above what many bank accounts and money market mutual funds are yielding.

"Even before Sept. 11, savings bonds were becoming more appealing to a lot of investors, especially after two years of a very choppy (stock) market and two years of double-digit negative returns," Pederson said.

He added that the new bonds are even more attractive for people who want to make a patriotic statement.

"For those who say, 'I'm concerned, I would like to do whatever I can,' here's a way to show support and get a competitive return at the same time," he said.

One caveat: Like all U.S. savings bonds, there are penalties for early withdrawal.

The bonds earn interest for 30 years. They can be redeemed after six months, but a three-month interest penalty is applied to bonds that are cashed out before five years.

Like other savings bonds, Patriot Bonds are exempt from state and local income taxes. Federal tax can be deferred until they are redeemed.

On the Net:

www.savingsbonds.gov

Pederson's site: www.bondhelp.com