Savings bonds have long been a popular option for those looking to secure competitive interest rates with virtually risk-free investments. As interest rates have risen, the popularity of savings bonds has increased to the point that TreasuryDirect’s website crashed numerous times due to being overwhelmed by traffic.
The two types of savings bonds currently offered by the Treasury provide a great way to earn interest while avoiding the market volatility you might experience with higher-risk investments like stocks, mutual funds, and ETFs. However, many bondholders are uncertain about how to repay their bonds before or after the maturity date.
Read on to find out how to redeem savings bonds, where you can do so, what the penalties are for early withdrawal, and what the tax implications may be.
How to cash in a savings bond
Savings bonds can be redeemed at any time after one year from the date of issue. However, the steps needed to cash out these bonds depend on whether you hold electronic or paper bonds:
1. Electronic savings bonds can be redeemed online through treasurydirect.gov. Funds can be transferred via direct deposit to your linked bank account (e.g., checking account, traditional savings account, or high-yield savings account) in as little as two business days.
2. For paper bonds, you need to take them to a physical financial institution. In some cases, your bank or credit union may require you to have an account in order to cash paper bonds.
Savings bonds must be held for at least one year before being cashed, and if they are redeemed before being held for five years, the bondholder must lose some of the accrued interest.
Because savings bonds are often given as gifts to others, it is especially important to first understand what they are and the differences between the two types currently offered by the U.S. government.
What is a savings bond?
Savings bonds are debt instruments sold by the Treasury Department that the U.S. government uses to finance spending. They have a maturity of 30 years and the interest is compounded twice a year. The interest rate can be fixed or variable depending on the type of savings bond and how close it is to maturity.
Acting as loans to the government, savings bonds are considered one of the safest investments available, making them attractive to conservative, risk-averse investors. This is because they are backed by the full faith and credit of the American government, which has never defaulted on its debts.
Learn more about why they make good investments by reading our guide to the best savings bonds.
Types of savings bonds
Since 1935, numerous types of savings bonds have been issued by the Treasury Department. Most of them have been retired, such as Series A and Series E bonds. Currently, the government offers two types: Series I and Series EE. The following section details both.
Series I savings bonds (also called I bonds)
Series I bonds are designed to protect investors from inflation. With these savings bonds, you earn both a fixed interest rate and a variable interest rate that adjusts twice a year (May 1 and November 1) in accordance with the current inflation reading as determined by the price index to consumption (CPI). The bonds have a maturity of 30 years.
EE series savings bonds
Series EE bonds are attractive because they are guaranteed to double in value in 20 years. Since May 2005, these bonds have a fixed interest rate for the first 20 years and can be adjusted thereafter. Like I bonds, Series EE bonds mature after 30 years.
Retirement savings bonds
The Treasury Department lists 19 retired or historic savings bonds on the TreasuryDirect website. Even though these paper bonds are no longer available for sale, most of them can still be redeemed by bondholders.
Three ways to cash in a savings bond
There are three main ways to redeem a savings bond. This section describes each of them.
Online via TreasuryDirect
The first way to redeem a savings bond is online through treasurydirect.gov. This process is simple if you already have a TreasuryDirect account that was used to initially purchase savings bonds:
- After logging in, click on the MangeDirect tab at the top of the page.
- Next, under My Titles, click on “Redeem Titles.”
- On the Redemption page, choose the button next to the type of title you want to redeem.
You can redeem your entire savings bond or any amount over $25. If you cash out a partial amount, you must leave at least $25 in your TreasuryDirect account. Additionally, if you cash out a portion of the bond, you will only receive interest on the refunded amount. For tax purposes, you’ll need to fill out Form 1099-INT, which is used to report taxable interest income.
If you don’t have a TreasuryDirect account but have electronic savings bonds (e.g., gift cards), you’ll need to create an account. This will require some personally identifiable information, such as your Social Security number.
Once your account is set up, you will be asked to link a savings or checking account, where the funds will be deposited after the savings bonds are redeemed. Next, follow the instructions listed above to cash in your electronic savings bonds.
At a financial institution
While electronic savings bonds are the most popular option, if you received a tax refund after filing your tax return, you can use up to $5,000 to purchase Series I paper savings bonds in $50 increments using the form IRS 8888. These paper savings bonds can be redeemed at financial institutions. Only Series EE electronic savings bonds are currently available, but older paper bonds can still be redeemed at some banks and credit unions.
In some cases, the financial institution where you intend to cash the bonds will require you to have an account. Unlike electronic savings bonds, you cannot cash out a partial amount of a paper savings bond. For tax purposes, when you redeem paper savings bonds, the bank will complete and send Form 1099-INT for you.
Via mail
The last option you have for redeeming your savings bond is to do so by mail. This requires you to complete Form FS 1522. It is important to note that if the value of the bond you are cashing in exceeds $1,000, you must have your signature notarized by a notary public, financial institution, or program participant. Treasury-recognized signature guarantee or a Treasury-approved Medallion program participant. After you redeem your savings bond, you will need to complete Form 1099-INT for tax purposes.
How savings bonds are taxed
Series I and Series EE bonds are taxed identically. At maturity or in the case of early collection, the taxable portion is equal to the face value of the bond minus the original price. The remaining amount is the interest earned.
According to the IRS, accrued interest is subject to federal income tax. However, these bonds are not subject to state or local income taxes. If you inherit savings bonds, as a beneficiary, you may have to pay federal income taxes on the interest if the executor does not include the pre-death interest amount on the decedent’s final tax return. To help you determine your tax liability, you can use a savings bond calculator to determine how much interest you will earn.
In some circumstances, you may avoid paying taxes on the interest you receive from savings bonds if those funds are used for eligible education expenses. The TreasuryDirect website explains how to use bonds to pay for higher education.
Redemption of savings bonds before maturity
Series I and Series EE bonds mature after 30 years. But that doesn’t mean you have to wait until the expiration date to redeem them. However, if you don’t meet certain criteria, you may face early withdrawal penalties.
You must hold both types of savings bonds for at least one year. After that first year you will be able to cash them in. But if you do so before five years from the issue date, you will have to forfeit the last three months of accrued interest. Bondholders who have held savings bonds for at least five years can redeem them without penalty.
What is a savings bond Frequently asked questions
How long does it take for savings bonds to expire?
Both Series I and Series EE savings bonds have a maturity of 30 years. However, bondholders can redeem them before the maturity date, provided they have held them for at least one year. For savings bonds held for a minimum of five years, there are no penalties for early withdrawal.
Do savings bonds have variable interest rates?
Series I bonds have both a composite rate, which is fixed, and a variable rate, which is adjusted every six months to reflect the latest CPI reading. Series EE bonds have a fixed interest rate for the first 20 years. Thereafter, the rate can be adjusted for the remaining 10 years before maturity.
Are savings bonds taxed as income?
Only interest earned on savings bonds is considered income by the IRS. Therefore, any interest you earn is subject to federal income tax, but not state or local income taxes. In some cases, using interest for qualified education expenses can reduce or eliminate your tax liability.
Money’s Summary How to Cash in a Savings Bond
Savings bonds are a type of debt security offered by the U.S. Department of the Treasury that pays interest to investors over the course of 30 years. Because they are backed by the full faith and credit of the U.S. government, they are considered low-risk investments that can diversify your portfolio and help you achieve your personal financial goals.
The Treasury Department currently offers two types of U.S. savings bonds: Series I and Series EE bonds. These bonds can be redeemed at any time after the first year, although bonds cashed in before five years are subject to early withdrawal penalties. These savings bonds can be redeemed in three ways: online through TreasuryDirect, at financial institutions or by mail. After you cash in your savings bonds, the interest you receive is considered taxable income by the IRS.