How to Cash Out Treasury Bonds: What You Need to Know

Treasury bonds are debt instruments that allow individuals to lend money to the U.S. government, typically in exchange for interest payments or a return at maturity. Understanding the process of converting these investments back into cash is important for any holder. This guide explores the steps and considerations for cashing out different types of Treasury bonds.

Understanding Your Treasury Holdings

Identifying the specific type of Treasury bond held is the first step, as the redemption process varies. Treasury securities fall into two main categories: marketable securities and U.S. Savings Bonds.

Marketable securities, such as Treasury Bills, Notes, Bonds, and Treasury Inflation-Protected Securities (TIPS), can be bought and sold on the open market. Treasury Bills are short-term securities. Treasury Notes have intermediate maturities of two to ten years, while Treasury Bonds are long-term investments, often maturing in 20 or 30 years. Both Notes and Bonds typically pay interest every six months. TIPS are unique marketable securities where the principal value adjusts with inflation.

U.S. Savings Bonds, primarily Series EE and Series I bonds, are non-marketable. They cannot be traded on a secondary market and must be redeemed directly with the U.S. Treasury. Series EE bonds are designed to double in value over 20 years, and Series I bonds feature a composite interest rate that adjusts every six months. These savings bonds earn interest until redeemed or they reach their final maturity, typically 30 years.

The method of holding your Treasury bonds also dictates the redemption pathway. Many modern Treasury securities are held electronically through TreasuryDirect. Marketable securities are also frequently held in commercial book-entry form through a brokerage account. Some individuals may still possess physical paper savings bonds, which have distinct redemption requirements. To prepare for redemption, locate key information such as the security type, issue date, maturity date, and for paper bonds, the serial number. For electronic holdings, this information is available within your online account.

Cashing Out Marketable Securities

Redeeming marketable Treasury securities, such as Treasury Bills, Notes, Bonds, and TIPS, depends on whether the security has reached its maturity date or if you intend to sell it beforehand. Upon maturity, the process is generally automatic. For securities held in a TreasuryDirect account, the principal is typically deposited into your linked bank account on the maturity date. If your marketable securities are held with a bank, broker, or dealer, they will usually process the maturity payment automatically and disburse the funds to your account. This ensures a seamless return of principal.

Selling marketable securities before maturity involves different steps, particularly for those held in a TreasuryDirect account. TreasuryDirect does not facilitate direct sales on the secondary market. You must first transfer the security from your TreasuryDirect account to a commercial book-entry system, such as an account with a bank, broker, or dealer. This transfer requires completing FS Form 5511, the “TreasuryDirect Transfer Request,” and submitting it as directed. Once transferred to your brokerage account, you can then instruct your broker to sell the security on the open market. Brokers handle the transaction and deposit the proceeds into your brokerage or linked bank account, minus any applicable fees.

The process for selling marketable securities already held within a brokerage account is more straightforward. Simply contact your broker or financial advisor and provide instructions to sell the security. They will execute the sale on the secondary market on your behalf. The timing of the sale and market conditions will determine the sale price. After the transaction, proceeds are typically credited to your account within a few business days. Physical marketable bonds, though less common, require submission to the Bureau of the Fiscal Service for redemption.

Cashing Out Savings Bonds

Cashing out U.S. Savings Bonds, including Series EE and Series I bonds, differs from marketable securities because they are non-marketable. Electronic savings bonds held in a TreasuryDirect account offer a streamlined redemption. Log into your TreasuryDirect account and navigate to the “ManageDirect” or “Current Holdings” section. You can then initiate the redemption process, selecting the bonds you wish to cash. You have the flexibility to redeem a partial amount of the bond, provided at least $25 remains. The system will prompt you to specify the amount and select a linked bank account for deposit, with funds typically arriving within two business days.

For paper savings bonds, the primary method of redemption involves presenting the bond at a local bank or financial institution. Call your bank beforehand to confirm they offer this service, as not all institutions do. When visiting the bank, provide valid identification and sign the bond in the presence of a bank official. For larger redemption amounts, typically over $1,000, a certified signature may be required. Paper savings bonds must be cashed for their full value; partial redemptions are not possible.

If a local bank cannot cash your paper savings bonds, or if you prefer to redeem them by mail, send them to the Bureau of the Fiscal Service. This requires completing FS Form 1522, the “Application for Payment of United States Savings Bonds,” available on the TreasuryDirect website.

All savings bonds must be held for at least one year from their issue date before redemption. If you redeem a savings bond before holding it for five years, you will forfeit the last three months of interest earned. Waiting at least five years can maximize your interest earnings.

Financial and Tax Implications

Cashing out Treasury bonds involves specific financial and tax implications that impact the net proceeds received. Interest accrual and payment mechanisms differ between marketable securities and savings bonds. Marketable securities, such as Treasury Notes and Bonds, typically pay interest semi-annually. When these securities are sold before maturity, the seller receives any accrued interest up to the settlement date, which is the interest earned since the last coupon payment date. Upon maturity, the final interest payment is made along with the return of the principal.

For savings bonds, interest accrues and compounds semi-annually, but it is only paid out when the bond is redeemed. Interest ceases to accrue once the bond reaches its final maturity date, which is typically 30 years for Series EE and I bonds.

The taxation of income derived from Treasury securities is a significant consideration. Interest income from all Treasury securities, including marketable bonds and savings bonds, is subject to federal income tax. This income is generally taxed at your ordinary income tax rate. For tax reporting purposes, you will typically receive a Form 1099-INT, “Interest Income,” from the entity that paid you the interest, whether it’s the TreasuryDirect system or your brokerage. In some cases, such as with Treasury Bills sold at a discount, the interest may be reported on Form 1099-OID, “Original Issue Discount.”

A notable advantage of Treasury bond interest is its exemption from state and local income taxes. This exemption can lead to substantial tax savings, particularly for investors residing in states with high income tax rates. However, this state and local tax exemption applies only to the interest income. When marketable securities are sold before maturity, any gain or loss realized from the sale is subject to capital gains tax rules. A capital gain occurs if the selling price exceeds the purchase price, while a capital loss occurs if the selling price is lower.

Capital gains are subject to federal income tax, and unlike interest income, they may also be subject to state income taxes. The tax rate applied to capital gains depends on the holding period; short-term gains (assets held for one year or less) are taxed at ordinary income rates, while long-term gains (assets held for more than one year) typically qualify for lower, preferential rates. It is important to accurately report all income and capital transactions to the Internal Revenue Service.