When Is the Best Time to Cash In Savings Bonds?

Savings bonds are a low-risk investment product issued by the U.S. Department of the Treasury, backed by the full faith and credit of the U.S. government. Understanding the optimal timing for redeeming these bonds is important for maximizing their value.

Understanding Savings Bond Growth

Modern savings bonds, specifically Series EE and Series I bonds, accrue interest over time. Series EE bonds issued after May 2005 earn a fixed interest rate set at the time of purchase, which remains constant for at least the first 20 years. These bonds are guaranteed to double in value at 20 years. After 20 years, they continue to earn interest for an additional 10 years, reaching a final maturity of 30 years, at which point they stop accruing interest.

Series I bonds offer a composite interest rate that combines a fixed rate and a variable inflation rate. The fixed rate is set at the time of purchase and remains for the bond’s life, while the inflation rate adjusts every six months based on the Consumer Price Index for All Urban Consumers (CPI-U). This structure provides protection against inflation, as the bond’s value keeps pace with rising prices. Both EE and I bonds earn interest monthly, which is compounded semi-annually, meaning interest earned is added to the principal, and subsequent interest is calculated on the new, larger principal.

Bonds can be redeemed after 12 months from their issue date. However, redeeming a bond within the first five years results in a penalty where the last three months of interest are forfeited. For example, if a bond is redeemed after 24 months, only 21 months of interest are received.

Determining Your Bond’s Value and Interest Rate

To make informed decisions about redemption, bondholders need to know their bond’s current value and the interest rate it is earning. The primary tool for this is the Savings Bond Calculator provided by the U.S. Department of the Treasury on the TreasuryDirect website. This official online tool allows for the estimation of current value for Series EE, Series I, and older Series E paper bonds.

Users input specific details such as the bond’s series (EE or I), its denomination, and the issue date. For paper bonds, this information is printed on the bond itself. The calculator then applies the government-set interest rates and semi-annual compounding to determine the bond’s current worth, accrued interest, and total redemption value.

While the online calculator is designed for paper bonds, electronic bonds held in a TreasuryDirect account can be valued by logging directly into the account. The calculator provides valuable insights into the bond’s growth and helps determine if continued holding is beneficial.

Key Factors for Optimal Redemption Timing

Deciding when to redeem a savings bond involves considering several factors. The 5-year rule is a primary consideration; redeeming a bond before five years means forfeiting the last three months of interest. Waiting at least five years results in a more complete return on the investment.

Another factor is the bond’s original maturity. At 20 years, EE bonds are guaranteed to double in value. While bonds continue to earn interest past their original maturity, it is important to assess if the current interest rate remains competitive with other low-risk investment options.

Approaching final maturity is a definitive deadline for redemption. Both EE and I bonds cease earning interest entirely after 30 years from their issue date. Redemption is advisable at or before this point.

The current economic climate, especially inflation, influences the decision to hold or redeem I bonds. Since I bond rates adjust with inflation, high inflation can make them more attractive to hold, while lower inflation might reduce their appeal. For all savings bonds, comparing their earning rate to prevailing interest rates on other safe investments, such as certificates of deposit or high-yield savings accounts, can help determine if the bond is still providing a favorable return.

Interest earned on savings bonds is subject to federal income tax, though it is exempt from state and local income taxes. Tax on the interest can be deferred until the bond is redeemed or matures. An exception exists for qualified higher education expenses: interest from Series EE and I bonds issued after 1989 may be excluded from federal income tax if the proceeds are used for tuition and fees at eligible educational institutions.

Cashing In Your Savings Bonds

Once the decision to redeem a savings bond has been made, the process varies depending on whether the bond is electronic or a paper certificate. For electronic bonds held in a TreasuryDirect account, redemption is an online process. The bondholder logs into their account, navigates to the “ManageDirect” section, and selects the option to cash securities. The funds are then directly deposited into the linked bank account.

For paper savings bonds, redemption can often be completed at most financial institutions, such as banks or credit unions. It is advisable to contact the bank beforehand to confirm their specific requirements, as some may require an existing account or limit the amount they will cash. The bondholder generally needs to present the paper bond along with valid identification. Alternatively, paper bonds can be redeemed by mail through TreasuryDirect. Paper bonds must be cashed for their full value, unlike electronic bonds which can often be partially redeemed.