It's a good time to cash in 1986 savings bonds

Thanks to the higher interest rates of 1986, U.S. savings bonds were a huge deal at the time - to some minds, maybe almost as hot as the stock market.

The new year will mark a milestone: Millions of Series EE savings bonds bought in 1986 will stop earning interest at various points during 2016, depending on when the bond was issued, and those bonds need to be cashed.

No one will send notices or automatically redeem these bonds for you. It's totally up to you.

Nearly $12 billion in savings bonds were bought in 1986. As of the end of October, more than 12.5 million Series EE savings bonds bearing 1986 issue dates were outstanding, according to the federal Bureau of the Fiscal Service.

Only a few years had more sales for savings bonds, according to Daniel Pederson, author of Savings Bonds: When to Hold, When to Fold and Everything In-Between and president of the Savings Bond Informer. (Other big years: 1992, with $17.6 billion in bonds sold; 1993, with $13.3 billion sold; and 2005, with $13.1 billion.)

Bonds bought from January through October 1986 had an initial rate of 7.5 percent for the first 10 years. The rate was set to fall to 6 percent on newly purchased bonds beginning in November 1986, so people really loaded up in October 1986.

Pederson said his former office at the Federal Reserve Bank branch in Detroit received more than 10,000 applications for savings bonds in the last four days of October 1986. Before then, 50 applications a day was typical.

What is a bond really worth? A $50 face value doesn't mean the bond is worth $50. Back in 1986, for example, you paid $25 for a $50 Series EE bond. So you've been building interest toward the $50 value and beyond.

How much money you get when you cash your bond will vary considerably on the bond and what interest rates were paid in its lifetime. Using the Savings Bond calculator at www.treasurydirect.gov., you can determine a bond's current value.

How much money are we talking about? A $50 Series EE savings bond picturing George Washington and issued in January 1986 was worth $113.06 as of December. The bond will earn a few more dollars in interest at the next payment in January 2016.

A $500 savings bond with a picture of Alexander Hamilton issued in April 1986 was worth $1,130.60 as of December. The next interest payment is in April 2016.

All bonds bought in 1986 now are earning 4 percent until their final maturity date. Pay attention to when the next interest payment is made onto your bonds.

Savings bonds bought earlier in 1986 paid 7.5 percent for the first 10 years. Bonds bought in November and December 1986 paid 6 percent for the first 12 years. After that, both earned 4 percent.

Look at the top right corner of the bond to find the issue date.

Where can bonds be cashed? Check with your bank; customers' bonds can often be cashed easily, and for large amounts at once. But some banks and credit unions will not redeem savings bonds at all.

For noncustomers, Chase and PNC Banks have a $1,000 limit on cashing savings bonds, for example.

If you have a large stack of bonds, you might want to call a bank in advance to find a good time to come in. Joyce Harris, a spokeswoman for the federal Bureau of Fiscal Service, said it also can be a good idea to check with the bank first on its dollar limits.

Don't sign the request for payment on the back of your bonds until you are at the financial institution and are instructed to sign.

What kind of taxes will you owe? You'll need to figure out how much of the money you receive can be attributed to interest.

What you originally paid for the savings bond, its principal portion, is not taxable. Interest earned is taxed at regular income-tax rates, not at a capital-gains income tax rate. So a $500 bond issued in April 1986 would be worth $1,130.60 if you cashed it in December 2015. The buyer of the bond paid $250 for it; $880.60 of interest would be taxable.

What if you cash all the 1986 bonds that hit final maturity in 2016? You'd pay taxes on those bonds on your 2016 tax return.

It's important to factor in the interest and save your paperwork to prepare your tax returns. TreasuryDirect.gov has details on who owes the tax.