Key Highlights
Here are the main points to remember when you’re ready to cash in a savings bond:
- You can redeem electronic savings bonds online through your TreasuryDirect account.
- A paper savings bond can be cashed by mail with the Treasury Department or at a financial institution, but policies vary.
- Most banks require you to be an existing customer to cash a paper bond.
- You must hold a savings bond for at least 12 months before cashing it.
- The interest you earn is subject to federal income tax but is exempt from state taxes.
- Funds can be sent via direct deposit to your bank account.
Understanding Savings Bonds and Their Types
Have you ever received a savings bond as a gift and wondered what it is? When you own a savings bond, you’ve essentially given a loan to the U.S. government. In return, the government promises to pay you back with interest over a set period. Because they are backed by the United States government, they are considered a low-risk investment compared to the stock market.
There are different types of savings bonds, and the process for cashing them varies. The most common active series are Series EE and Series I, which are now issued electronically through a TreasuryDirect account. You might also have an older paper bond, like Series HH bonds. Understanding which type you have is the first step in the redemption process.
Key Features of EE, I, and HH Savings Bonds
The U.S. Treasury currently issues two main types of savings bonds: Series I and Series EE. Each has unique features that affect its interest rate and how it grows in value. If you want to cash in your electronic Series EE or Series I savings bonds, you can do so through your TreasuryDirect account by navigating to the “ManageDirect” section and following the links for cashing securities.
Series I bonds are designed to protect your money from losing value due to inflation. They earn interest through a combination of a fixed interest rate and a variable rate that changes based on the inflation rate. In contrast, Series EE bonds earn a fixed interest rate. The Treasury guarantees that a Series EE bond will double its face value if you hold it for 20 years.
Older Series HH bonds, which were sold until 2004, are no longer earning interest but you may still have some to redeem. To determine the current value of any bond, you can use online tools or check your account.
| Bond Feature | Series I | Series EE |
|---|---|---|
| How It Pays Interest | Fixed rate + variable rate based on inflation | Fixed interest rate |
| Primary Goal | Protects money against inflation | Guaranteed to double in value in 20 years |
| How to Purchase | Electronically via TreasuryDirect | Electronically via TreasuryDirect |
How to Identify the Type and Status of Your Savings Bonds
Before you can cash in your savings bond, you need to know what you have. For an electronic savings bond, finding its status is simple. Just log in to your TreasuryDirect account to view your current holdings. There, you can click on any specific bond to see its current value and other details.
If you have a paper bond, you can figure out its worth by using the savings bond calculator on the Treasury Department’s website. You’ll need some information from the bond itself to use the tool effectively. Have you looked at your paper bond closely?
To use the calculator, you will need to provide the following details:
- The bond series (e.g., EE, I)
- The bond’s denomination or face value
- The issue date
- The bond serial number (optional, but useful for saving an inventory)
Once you know the type and value, you can decide on the next steps, such as taking your paper savings bonds to a bank to cash them.
When Is the Right Time to Cash In Savings Bonds?
Timing is everything when it comes to maximizing your savings bond’s value. While you can cash in a bond after holding it for just one year, it’s often better to wait. If you cash it in before five years, you will lose the last three months of interest as a penalty. Are you willing to forfeit that interest for early access to your funds?
To get the most out of your investment, the best time to cash in a bond is after it has reached its final maturity. Most bonds earn interest for up to 30 years. Once a bond matures, it stops earning interest, so there’s no financial benefit to holding onto it any longer. Understanding the maturity periods and potential penalties is crucial to your redemption process.
Maturity Periods and Penalties for Early Redemption
Savings bonds have specific rules about when you can cash them without a penalty. You must hold any savings bond for a minimum of 12 months. However, if you choose early redemption before holding the bond for five years, you will face a penalty. This penalty is equivalent to the last three months of interest payments earned on the bond.
For example, if you cash a bond after 24 months, you will only receive 21 months of interest. This rule encourages long-term saving and allows the bond to accrue more interest. The fixed interest rate on some bonds means that this penalty can be easily calculated, but it’s a loss you should consider carefully.
Once a bond reaches its final maturity, typically after 30 years, it stops earning interest. There is no penalty for cashing in a bond after it has fully matured. In fact, it is recommended to cash it in at this point, as the money will no longer be growing.
Signs Your Bond Is Ready to Be Cashed In
How do you know if your savings bond is ready to be turned into cash? The most important sign is that it has reached its final maturity. You can check the maturity periods for your specific bond on the TreasuryDirect website. Once it matures, it no longer earns interest, so its current value will stop increasing.
Another reason to begin the redemption process is if you have a specific financial goal in mind. Perhaps you want to invest the money elsewhere, pay for educational expenses, or simply need the cash. This is especially true for older paper EE bonds that might be sitting in a drawer, forgotten.
Here are a few key signs that it’s time to cash in your bond:
- The bond has reached its final maturity (usually 30 years).
- You need the funds for a major purchase or investment.
- You want to avoid complex tax situations for your heirs.
- The current interest rate environment offers better returns elsewhere.
Knowing these signs helps you decide the right time for your redemption. If you have a paper savings bond, the next step is to prepare your documents and visit a bank.
Preparing to Cash In Your Savings Bonds
When you’re ready to cash in your savings bonds, a little preparation goes a long way. The process isn’t as simple as withdrawing money from a savings account; you’ll need the right documentation to prove you’re the rightful owner. Whether you’re redeeming online through your TreasuryDirect account or in person, having your information ready is key.
You will need to provide various forms of identification and personal details, such as your Social Security number. If you’re mailing in a paper bond, you may need to complete a specific document known as an FS Form. Let’s look at exactly what you’ll need to have on hand.
Documentation and Identification Requirements
Yes, you will need specific documents and identification to cash in your savings bonds. Financial institutions and the Treasury Department require these to prevent fraud and verify your identity. If you are cashing a paper bond at a bank, you should bring the bond itself along with one or two forms of identification. A government-issued photo ID, like a driver’s license or passport, is usually required.
When redeeming paper bonds by mail, you’ll need to complete FS Form 1522. This form asks for your Social Security number or Taxpayer Identification Number, as well as your direct deposit information. If the bonds you are cashing are worth more than $1,000, you will need to have your signature on the form certified by a notary or an authorized certifying officer at a bank.
If you are not the owner listed on the bond, you will need to provide legal evidence that you are entitled to the funds. Always call your bank ahead of time to confirm their specific requirements.
- The original paper savings bond
- Government-issued photo ID
- Your Social Security number
- Completed FS Form 1522 (for mail-in redemptions)
Special Cases: Cashing Bonds Issued to Children or Discontinued Series
Special situations, like cashing a bond issued to a child, require a few extra steps. If a savings bond was issued to a young child who is not old enough to sign legal documents, a parent can typically cash the bond on their behalf. The parent will need to provide their own identification and may need to present the child’s birth certificate as legal evidence of the relationship.
In the unfortunate event of the death of a savings bond owner, the process for redemption depends on whether a co-owner or beneficiary is named on the bond. If so, that person can redeem it with proper identification and a death certificate. If not, the bond becomes part of the owner’s estate. Discontinued series, like the Series HH paper bonds, can also be cashed. Since these are a type of certificate of indebtedness that no longer earns interest, you should redeem them.
You can cash old savings bonds from discontinued series, such as HH savings bonds, by mailing them to the Treasury Department. You’ll need to use FS Form 1522 and follow the instructions for paper bond redemption, as most banks will not handle these.
Tax Considerations When Cashing Savings Bonds
An important part of cashing a savings bond is understanding the tax implications. The interest payments you receive are subject to federal income tax, but they have the advantage of being exempt from state and local income taxes. This tax benefit can be a significant plus, depending on where you live.
You typically report the interest income on your federal tax return in the year you cash the bond. This is known as tax deferral, and it can increase your compound interest returns over time. Depending on the amount of interest, you may need to fill out specific tax forms. Let’s explore how this interest is taxed and how to report it.
How Savings Bond Interest Is Taxed
When you cash in a savings bond, the interest you’ve earned is considered taxable income by the federal government. For Series EE and I bonds, you generally have two options for handling the federal income tax. The most common method is to defer paying taxes on the interest until you cash the bond. This means all the interest payments you’ve accrued over the years are reported on your tax return in one lump sum in the year of redemption.
Alternatively, you can choose to report the interest earned each year and pay taxes as you go. This option is less common but can be useful in some financial situations. For Series HH bonds, reporting interest annually was required. The total interest is the difference between the bond’s current value at redemption and the price you paid for it.
A major benefit is that savings bond interest is not subject to state or local income taxes. In some cases, you may even be able to exclude the interest from federal tax if you use the money to pay for qualified higher education expenses.
Reporting and Deposit Options for Cashed Bond Funds
Once you’ve cashed your savings bonds, you have convenient options for receiving your money. Yes, you can deposit the funds from cashed savings bonds directly into your bank account. The Treasury Department strongly encourages using direct deposit for a fast and secure transfer of funds. This applies whether you redeem online or by mail.
When you cash an electronic bond through your TreasuryDirect account, you can link a bank account, credit union account, or even a money market account to receive the funds. For paper bonds redeemed by mail, you will provide your account and routing numbers on FS Form 1522 to set up the direct deposit. If you cash a paper bond at your local bank, they can often deposit the funds directly into your checking or savings account on the spot.
Here are your primary deposit options:
- Direct deposit into a checking or savings account.
- Transfer to a linked credit union account.
- Deposit into a money market account.
This flexibility makes it easy to access and use your money right away.
Frequently Asked Questions
Can I cash in savings bonds if they were issued to a child?
Yes, you can cash a savings bond that was issued to a child. A parent can redeem the paper bond on the child’s behalf by presenting their own forms of identification and sometimes legal evidence, like a birth certificate. The child does not need to be present if they are too young to sign.
Is there a penalty for cashing savings bonds before maturity?
There is no penalty for cashing a savings bond after its final maturity. However, there is a penalty for early redemption within the first five years of owning the savings bond. If you cash it before the five-year mark, you will forfeit the last three months of interest you earned.
Can I directly deposit cashed bond funds into my bank account?
Yes, you can have your funds sent via direct deposit to your bank account. When you cash a savings bond through your TreasuryDirect account or by mail, you can provide your account information to have the money deposited electronically. Many financial institutions also offer to deposit funds directly upon redemption.