How to Cash Out Bonds: Steps for Every Type

A bond represents a loan from an investor to a borrower, such as a corporation or government. The borrower pays interest and returns the principal at maturity. Cashing out a bond means converting this investment back into cash, either by redeeming it with the issuer or selling it on a secondary market. The process varies depending on the bond type and how it was acquired.

Understanding Your Bond Type

Identifying the specific type of bond you hold is the first step toward understanding how to convert it to cash. Each bond category has distinct characteristics that dictate its redemption or sale process. Knowing whether your bond is a U.S. government-issued security or a corporate obligation will guide your subsequent actions.

U.S. Savings Bonds, such as Series EE and Series I bonds, are issued directly by the U.S. Treasury and are popular for individual investors. These bonds have specific rules, including a minimum holding period of one year before they can be redeemed. While some older Series EE bonds were issued as paper certificates, most new purchases are now held electronically through TreasuryDirect.

Other U.S. government securities, including Treasury Bonds, Notes, and Bills, are also issued by the Treasury but are typically traded on a secondary market. These can be purchased directly through TreasuryDirect or through a brokerage account. Unlike savings bonds, they do not have a minimum holding period for sale on the secondary market.

Corporate bonds are debt instruments issued by companies to raise capital. These bonds are generally traded through brokerage accounts on a secondary market, allowing investors to buy and sell them before their maturity date. Similarly, municipal bonds are issued by state and local governments to finance public projects. Like corporate bonds, they are usually bought and sold through brokerage firms.

Gathering Required Information and Documentation

Before cashing out your bond, compile specific information and documentation. The required materials depend on how your bond is held and its type.

For U.S. Savings Bonds held electronically through TreasuryDirect, you need your login credentials, including account number and password. Ensure your linked bank account information is current and accurate, as redemption proceeds deposit there. Your Social Security Number can be useful for account verification.

If you possess paper U.S. Savings Bonds, you need the physical bond certificate. A valid government-issued identification, such as a driver’s license or passport, is required to verify your identity. You will also need your bank account information for direct deposit, and the bond’s issue date and serial number. For mail-in redemptions, specific forms, such as FS Form 1522, are necessary.

For Treasury, corporate, or municipal bonds held in a brokerage account, access your brokerage account number and login credentials. Confirm your bond holdings and ensure your linked bank account information is up-to-date for electronic funds transfer. All personal information on file, including your name, address, and Social Security Number, should match official records.

Executing the Redemption or Sale

Once you have gathered the required information, you can proceed with your bond’s redemption or sale. The method for converting your bond into cash depends on its type and how it is managed.

For U.S. Savings Bonds held electronically via TreasuryDirect, begin by logging into your account on the TreasuryDirect website. Navigate to the “ManageDirect” section and select the “Redeem Securities” option. You will then select the specific bond you wish to redeem, choose the amount you want to cash out, and confirm the bank account for the transfer. Funds from electronic redemptions are typically deposited into your linked bank account within one to two business days.

If you hold paper U.S. Savings Bonds, you generally have two primary options for redemption. Many financial institutions, such as local banks and credit unions, are authorized to redeem paper savings bonds in person; you will need to present the physical bond along with your government-issued identification. Alternatively, you can redeem paper bonds by mail directly through the Treasury Retail Securities Services by completing and submitting FS Form 1522, along with the original bond certificates. Mail-in redemptions typically take several weeks, often ranging from two to four weeks, for processing and fund disbursement.

For Treasury, corporate, and municipal bonds held through a brokerage account, the process involves selling the bond on the secondary market. You will need to log into your brokerage firm’s online platform or contact your financial advisor. Navigate to your bond holdings section and initiate a “sell” order for the specific bond you wish to cash out.

You may have the option to place a market order, which sells at the current market price, or a limit order, which sells at a specified price. Once the sale is executed, the proceeds, minus any brokerage fees, will be deposited into your account, with settlement typically occurring within one to two business days after the trade date.

Understanding Tax Implications

Cashing out a bond has tax implications. The tax treatment of bond income and capital gains can differ based on the type of bond and how it is redeemed or sold.

Interest earned on most bonds, including corporate bonds, U.S. Treasury bonds, and U.S. Savings Bonds, is generally subject to federal income tax. This interest is typically taxed in the year it is received or accrued, depending on your accounting method. For instance, the interest on U.S. Savings Bonds accrues over time and is typically taxed only upon redemption or maturity, though some taxpayers may elect to report it annually.

Regarding state and local taxes, U.S. Treasury and Savings Bond interest is exempt from state and local income taxes. However, interest from corporate bonds is typically subject to state and local income taxes. While municipal bond interest is often exempt from federal income tax, it may be subject to state and local taxes unless the bond was issued by a government entity within your state of residence, potentially qualifying for triple tax exemption.

If a bond is sold on the secondary market before its maturity date, such as a corporate or municipal bond, the transaction could result in a capital gain or loss. A capital gain occurs if the bond is sold for more than its adjusted cost basis, and this gain is subject to capital gains tax rates, which vary based on your income and the holding period (short-term or long-term). Conversely, selling a bond for less than its cost basis results in a capital loss, which can be used to offset other capital gains.

For U.S. Savings Bonds, an early redemption penalty applies if the bond is cashed out before it has been held for five years. This penalty results in the forfeiture of the last three months of interest earned on the bond. This effectively reduces the total amount of taxable interest received from the bond. When you redeem bonds, financial institutions and the U.S. Treasury will issue tax forms, such as Form 1099-INT, detailing the interest income or other proceeds, which you will need for reporting on your annual income tax return.