Key Takeaways
- Heirs who inherit I bonds owe federal income tax on the interest the bonds earned, unless the interest earned up to the owner’s death goes on the owner’s final return.
- In Suze Orman’s example, $10,000 of I bonds grows by $50,000 of interest, which would cost an heir in the 22% bracket $11,000.
- Stock bought for the same $10,000 and worth $60,000 at death takes that $60,000 as the heir’s cost basis, so selling it at that price owes $0.
- The owner, the executor and the heir each get some say in when the bonds’ tax is paid, and at whose rate.
New I bonds pay 5.51% through April 30, up from 4.26%. But if you’ve held I bonds for decades, the bigger question may be what happens to them after you’re gone.
Suze Orman answered it on the Nov. 8 episode of Suze Orman’s Women & Money, and her answer is bad news for anyone planning to leave I bonds to their kids. Whoever inherits the bonds inherits the tax on their interest. Fortunately, you, your executor and your heirs all get some say in when that tax gets paid.
Same $10,000, same $60,000
Orman was going through the downsides of I bonds for older savers when she got to what happens at death: “your beneficiaries do not get a step up in basis like they do in stocks, ETFs, real estate, and all of that.” Her example was $10,000 of I bonds bought in 2000 that could earn $50,000 of interest by 2030.
Let’s set that beside a stock. Say you put $10,000 into I bonds in 2000, as in Orman’s example, and another $10,000 into a stock in a regular brokerage account. You never cash in or sell either one, and when you die, each is worth $60,000: your original $10,000 plus $50,000 of growth.
Either way, your heirs inherit $60,000. But only one of those $50,000 gains gets taxed.
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Your heirs inherit the interest, too
Savings bond owners can put off reporting the interest until they cash the bonds. If you did that and bought the bonds with your own money, the interest is still owed after you die. All the interest earned both before and after the death is income to the person who gets the bonds. The exception is interest earned up to your death that’s reported on your final tax return instead.
Your heir doesn’t have to pay right away. They can put off reporting the interest until the year they cash the bonds or the bonds mature, whichever comes first. I bonds stop earning interest 30 years after they’re issued, so for Orman’s bonds bought in 2000, that’s 2030 at the latest.
Stocks work differently. An heir’s cost basis in inherited stock is generally its value on the day the owner died, so the gain built up before then is never taxed when the heir sells.
$11,000 versus $0
Say your heir is in the 22% bracket and all $50,000 of interest is taxed at that rate. Cashing the bonds costs them $11,000 in federal income tax. (I bond interest is exempt from state and local income tax, so at least there’s no state bill on top.)
The stock’s math is simpler. Your heir’s basis is $60,000, so selling at $60,000 shows no gain and owes $0. The $50,000 of growth is never taxed, by you or by them:
| Metric | I bonds | Stock |
|---|---|---|
| Your cost | $10,000 | $10,000 |
| Value when you die | $60,000 | $60,000 |
| Taxable to your heir | $50,000 of interest | $0 |
| Federal tax at 22% | $11,000 | $0 |
Same money in, same money out, and an $11,000 gap.
You still get some say in the timing
Someone will pay tax on the bonds’ $50,000. But fortunately, you get to choose when, and at whose rate:
- You can cash the bonds while you’re alive and pay the tax at your own rate. Orman’s worry is that in your 80s, with RMDs already coming out, the extra income could push you into a higher bracket, trigger IRMAA and raise the tax on your Social Security.
- Your executor can report the interest earned up to your death on your final return, which helps when your rate is lower than your heir’s.
- Your heir can cash the bonds in a year when their own income is low, as long as it’s before the bonds mature.
That third choice is the best argument for leaving I bonds in an estate, since an heir with little other income that year would pay far less than $11,000.
The way I see it, though, someone pays tax on the bonds’ $50,000 no matter what, and nobody ever pays tax on the stock’s gain. So if you own both and plan to spend some and leave some, I’d spend the I bonds first and leave your heirs the stock.
And if you’re buying at 5.51% today, the same thing will happen to these bonds. A bond bought this fall can earn interest for 30 years, and when it matures, the tax on all that interest comes due for whoever owns it then, you or your heirs.
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Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any of the stocks mentioned. Thank you for reading, and happy investing!
