Can You Cash a POD Savings Bond Before Death?

U.S. Treasury savings bonds are a secure investment, backed by the U.S. government. They offer a dependable way to save money and accumulate interest. For estate planning, a Pay-on-Death (POD) designation allows for a streamlined transfer of assets, ensuring the bond’s value passes directly to a named individual outside of probate.

Understanding Pay-on-Death Savings Bonds

A Pay-on-Death (POD) designation on a U.S. Treasury savings bond names a specific individual to receive the bond’s value upon the death of the registered owner. The registered owner is the person who purchased the bond. The designated beneficiary is the individual identified to inherit the bond’s proceeds.

During the owner’s lifetime, the POD designation does not grant the named beneficiary any immediate rights or control over the bond. The owner maintains complete and exclusive authority over the asset. This includes the ability to redeem the bond, change the beneficiary designation, or request the bond be reissued.

The beneficiary’s rights to the bond’s value only become active upon the verifiable death of the owner. Until that point, the bond remains solely under the owner’s dominion.

Owner Redemption Process

The owner of a Pay-on-Death savings bond can redeem it before their death, provided the bond has met its minimum holding period of one year. Redeeming a bond before five years have passed since its issue date will result in a forfeiture of the last three months of interest. After five years, there is no interest penalty for redemption.

Before initiating the redemption process, the owner should gather necessary information and documentation. This includes the bond’s serial number, the owner’s Social Security Number, and the bank account details. For in-person redemptions, a valid government-issued photo identification, such as a driver’s license or passport, is required.

For paper bonds, the physical bond is necessary. If the redemption value of paper bonds exceeds $1,000, the owner’s signature on FS Form 1522, “Special Form of Request for Payment of United States Savings and Retirement Securities,” may require certification by a notary or other certifying officer. If the value is $1,000 or less, a copy of valid identification may suffice. For electronic bonds, access to a TreasuryDirect account is necessary.

Electronic Bond Redemption

For electronic bonds, the owner logs into their TreasuryDirect account, navigates to the “ManageDirect” section, and selects “Redeem securities.” The system guides the owner to select the specific bond, initiate the redemption, confirm the amount, and designate the deposit account. Electronic bonds allow for partial redemption, requiring a minimum redemption of $25 and leaving at least $25 in the bond. Funds are deposited into the linked bank account within two business days.

Paper Bond Redemption

Paper bonds can be redeemed at qualified financial institutions, such as banks or credit unions, that offer this service. The owner presents the physical bond, signs it as required, and provides valid photo identification to a teller. It is advisable to contact the institution beforehand, as some banks may only offer this service to their account holders. Paper bonds must be redeemed for their entire value, as partial redemptions are not permitted.

Alternatively, paper bonds can be redeemed by mailing them directly to Treasury Retail Securities Services. This involves packaging the physical bond along with a completed FS Form 1522. Using certified mail provides a tracking record and added security for the valuable documents.

Tax Considerations for Redeemed Bonds

Interest earned on U.S. Treasury savings bonds is subject to federal income tax. This tax liability typically arises in the year the bond is redeemed, reaches its final maturity, or is otherwise disposed of. The owner has the option to defer reporting the interest until one of these events occurs, or they can elect to report the interest annually as it accrues.

The U.S. Treasury or the financial institution processing the redemption will generally issue a Form 1099-INT to the owner. This form reports the amount of interest earned if it exceeds a threshold, typically $10. This document is then used by the owner for federal income tax reporting purposes.

A notable advantage of U.S. Treasury savings bonds is that the interest earned is generally exempt from state and local income taxes. This exemption can offer a tax benefit, particularly for individuals residing in states with higher income tax rates. It is important to note that savings bond interest is considered ordinary income for federal tax purposes, not capital gains.