Social Security and savings bonds: 2 Q&A's

Q: My wife and I are already past the age of full retirement. Although we are both continuing to work full time, my wife, who is less than a year older than me, filed for her Social Security benefits upon turning 66. I filed and am now receiving the restricted benefit of one-half of her benefit since I have also become eligible for full retirement. I intend to wait until age 70 before claiming my own benefit. Since I have not technically filed for my own Social Security benefits, would my wife be able to receive the sole survivor benefits of my higher Social Security retirement benefit should I die before I turn age 70 and actually file? — Larry Gittin, Richmond, Va.

A: If you were to die prior to age 70 without yet having filed for retirement benefits, your wife's total benefit after she files for benefits as your widow would be whatever your retirement benefit would have been if you had filed on your date of death, says Mike Piper, author of Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less.

So, for example, if you die at age 69½, your wife’s total benefit would be your age 69½ retirement benefit, says Piper.

“Of note, this is only the case because your wife has already reached her full retirement age, or FRA, as well,” says Piper. “In a scenario in which a surviving spouse files for widow/widower benefits prior to full retirement age, those benefits are reduced for early filing.”

Q: In the early 1980s my husband and I started purchasing U.S. savings bonds on the payroll savings plan. Recently, my son wanted to borrow some money and I cashed two $1,000 bonds and was surprised to get over $4,000 in interest — which is good, but at tax time this may not be so good. My plan, I’m 71 now, is to save these bonds until I go into a nursing home and hope that the expenses from the nursing home will make the taxes less painful. Can you think of any other way that I could use the bonds without having problems at tax time? — Jewell Chapman, Des Moines

 A: According to Theodore Sarenski, the CEO of Blue Ocean Strategic Capital, you and your husband were buying Series EE bonds during what he calls “the golden period of interest rate earnings on savings bonds.”

And, the only way to cash in bonds of this type and not pay tax on the interest is if the proceeds of the bonds that were issued after 1989 are used to pay for college tuition and fees for yourself or for a qualifying dependent of yours, says Sarenski.  “I doubt if either of the exceptions apply to you at this time,” he says.

Sarenski says it would be a great idea, from a tax-planning standpoint, to use the interest generated from the EE bond to pay for nursing home costs. Unfortunately, EE bonds only pay interest for 30 years from the issue date of the bond.

So, some the EE bonds you purchased in the early ‘80s may already be past the date of paying any interest and all of the '80s bonds will be fully matured in the next four years, says Sarenski.  “At age 71, if you are healthy, you are a long way from needing care in an assisted living environment,” he says.

Sarenski’s best advice: Consult with your tax adviser and determine how many of these bonds you could cash in each year and keep yourself from moving to a higher tax bracket.  “A systematic cashing in of the Series EE bonds along with an investment strategy for the net proceeds of the bonds will give you better future than holding onto the bonds as they are not earning anything at all from here on,” he says.

Read Series EE Savings Bonds.

Robert Powell is editor of Retirement Weekly, contributes regularly to USA TODAY, The Wall Street Journal and MarketWatch. Got questions about money? Emailrpowell@allthingsretirement.com.