Cheat Sheet

Investing in Bonds For Dummies Cheat Sheet

From Investing in Bonds For Dummies

By Russell Wild

You may think of bonds as thoroughly modern financial instruments, but they have a long history. They played an important part in helping the Allies win World War II, for example. Every bond needs to be identified, which is where its CUSIP comes in. When you reach a certain age, the government requires that you begin withdrawing at least some money from your accounts, and you need to pay close attention to this, because if you don’t cash out the minimum amount, big fines are levied.

Bond History: The Important Story of War Bonds

At the heart of the fundraising effort in World War II was the creation of war bonds. Even before the United States entered World War II, a massive effort was underway to raise money to build the military and support allies in war-torn Europe and Asia.

In April 1941, with great fanfare, President Franklin D. Roosevelt purchased the very first such bond from Secretary of the Treasury Henry Morgenthau, Jr. Posters, radio commercials, newspaper advertisements, and newsreels in theaters spread the word that purchasing a bond was the patriotic thing to do.

The government made it easy to invest by issuing cards with slots for quarters. When a person collected 75 quarters — $18.75 — he or she could bring the card into any post office and receive a $25 bond redeemable in ten years (with no actual interest payments in the interim). That worked out to 2.9 percent annual compound interest — considerably lower than prevailing rates at the time.

More than six out of ten U.S. citizens bought war bonds, raising nearly $200 billion (worth about 13 times as much in today’s dollars), and Hitler and Hirohito got what was coming to them.

Identifying Bonds: What Is a CUSIP, Anyway?

All bonds have a CUSIP that identifies the bond in the same way that a license plate identifies a vehicle. CUSIP stands for Committee on Uniform Securities Identification Procedures, which is a part of the American Bankers Association.

Although it’s often referred to as a CUSIP number, that is something of a misnomer because a CUSIP typically contains both letters and numbers. The first six characters of the CUSIP identify the issuer, the next two characters identify the issue itself, and the ninth digit is called a check digit, its sole purpose to make computer readers happy. Here’s a CUSIP for a General Electric bond: 36966RXR2. Here’s one for a Fannie Mae bond: 31396CVP2.

Minimum Required Distribution: Don’t Miss It!

In the United States, people have the minimum required distribution (MRD) on 401(k) plans as well as regular and rollover IRAs. And woe is you if you miscalculate. Your finances will certainly be pummeled hard, but at least you won’t be stoned.

You should be happy to live in a country where people who break the law are given due process and, if found guilty of a crime, they’ll neither have their limbs removed, nor will they be stoned to death.

Of course, the calculation is easy — says the IRS. You simply take your retirement account’s starting balance as of December 31 the prior year and divide that number by your “life-expectancy factor” (which is found in IRS publication 590, available on the IRS website).

Don’t get it wrong! The penalty for taking less than your minimum required distribution is brutal. If you withdraw less than the required minimum amount, the IRS can nail you for a sum equal to 50 percent of the MRD not taken.

MRDs generally begin at age 70 and a half. If you feel uncomfortable doing the calculation yourself, a retirement specialist at the brokerage house where you have your account will help you, or you can ask your tax guru.