Should I Cash My Savings Bonds? What to Consider

Savings bonds have long served as a popular, low-risk investment for many individuals, often acquired as gifts or through payroll deductions. As financial circumstances evolve, bondholders frequently assess whether the moment is right to redeem these investments. This decision involves understanding the characteristics of the bonds, evaluating personal financial needs, and considering the associated tax implications.

Understanding Your Savings Bonds

Assessing your savings bonds begins with identifying their type, which dictates interest accrual and maturity. The two most common types are Series EE and Series I bonds. Series EE bonds earn a fixed interest rate, guaranteed to double in value by 20 years, and accrue interest for 30 years.

Series I bonds offer a variable interest rate that adjusts every six months, comprising a fixed and an inflation-adjusted rate. This protects the bond’s value against rising prices, and they also earn interest for 30 years. For electronic bonds, logging into your TreasuryDirect account provides immediate access to their current value and maturity date.

For paper savings bonds, the TreasuryDirect website offers a Savings Bond Calculator where you can input the bond’s series, denomination, and issue date to determine its current worth. The Treasury Hunt tool can also help locate matured, unredeemed paper bonds. All savings bonds have a minimum holding period of one year before they can be redeemed.

Cashing a bond before five years results in a penalty: forfeiture of the last three months of interest. For example, redeeming a bond after 18 months means only 15 months of interest are received. This penalty no longer applies after five years.

Deciding When to Cash

Cashing savings bonds often arises from specific financial needs or investment reassessment. Common scenarios include funding an emergency, making a substantial purchase, or paying off high-interest debt. Aligning redemption with a clear financial purpose ensures effective use of funds.

A significant factor is comparing the bond’s interest accrual against potential returns from alternative investments, known as opportunity cost. Savings bonds cease earning interest at their final maturity date, typically 30 years from issue. Holding a bond past maturity means foregone earnings from other investments.

Inflation can erode the purchasing power of a bond’s fixed return, especially for older bonds with lower interest rates. While Series I bonds are designed with an inflation-adjusted component, older Series EE bonds may offer yields below the rate of inflation. This reduction in real value means that the money received at redemption may buy less.

The five-year rule is important in the decision-making process. Cashing a bond before this period forfeits the last three months of interest. This penalty impacts net return, making it more advantageous to wait at least five years before redeeming.

Integrating bond redemption into broader financial goals involves considering how funds contribute to your overall strategy. If a bond is fully mature, no longer earning interest, or has a significantly lower interest rate than market alternatives, it may be time to redeem it. Funds could then be reinvested into higher-yielding options like a certificate of deposit (CD) or a money market account.

Cashing Your Savings Bonds

Once the decision to redeem a savings bond is made, understanding the procedural steps is important. The process varies for paper or electronic bonds. Paper savings bonds can often be redeemed at most financial institutions, including banks and credit unions.

Contact your bank or credit union beforehand, as some institutions have limitations or only cash bonds for account holders. When cashing a paper bond, present valid government-issued identification, like a driver’s license. Proof of ownership is also required; if your name changed, documentation like a marriage certificate may be necessary.

For higher value redemptions, typically over $1,000, a signature guarantee or notarization on Form FS Form 1522 might be required. Paper bonds must be cashed for their full value; partial redemption is not an option. After endorsement and verification, funds are typically disbursed via direct deposit.

Electronic savings bonds are redeemed through your TreasuryDirect account, offering a streamlined process. Log into your account, navigate to “ManageDirect,” and select the option to redeem securities. Electronic bonds allow for partial redemption, provided the amount is at least $25 and at least $25 remains in the bond. The system guides you through selecting bonds and specifying the destination bank account. Funds are typically transferred directly to your designated bank account within two business days.

Tax Considerations for Redeeming Bonds

Understanding tax implications is crucial for redeeming savings bonds. Interest earned is subject to federal income tax. Most bondholders defer reporting this interest and paying tax until redemption or final maturity, whichever occurs first. Some individuals may elect to report interest annually as it accrues.

A significant benefit is that interest earned is exempt from state and local income taxes. This provides a notable tax advantage compared to other interest-bearing investments. Upon redemption, TreasuryDirect or the financial institution will issue a Form 1099-INT, reporting the interest earned for tax purposes.

Under specific conditions, interest from Series EE and Series I savings bonds can be excluded from federal income tax if used for qualified higher education expenses. To qualify, bonds must have been issued after 1989, and the owner must have been at least 24 years old when issued. The exclusion applies to qualified education expenses for yourself, your spouse, or a dependent claimed on your federal tax return.

Qualified expenses generally include tuition and fees required for enrollment or attendance at an eligible educational institution. Income limitations also apply to this exclusion, meaning taxpayers with modified adjusted gross incomes above certain thresholds may have a reduced or eliminated benefit. For example, in 2025, the exclusion begins to phase out for single filers with modified adjusted gross incomes above $99,500 and for those married filing jointly above $149,250. To claim this exclusion, you must file IRS Form 8815 with your federal income tax return.