What Happens if You Cash in a Savings Bond Before the Maturity Date?

Savings bonds are very secure, but usually yield little after inflation.

Savings bonds are very secure, but usually yield little after inflation.

For little kids, receiving a savings bond as a gift might seem as useful as that ugly sweater grandma sewed or as exciting as a new pair of socks. However, if you've been sitting on the bonds for a while, but haven't reached the 30-year maturity period, you might be considering changing your investments and cashing in the bonds.

Early Cash-out Penalties

Both Series E/EE and Series I have minimum holding periods of 12 months. If you bought your bond less 12 months ago, you cannot cash it in. If you cash in savings bonds before five years passes, the Treasury docks your payout by three months of interest. If the bond is more than five years old, there is no penalty for withdrawing the money early.

Check Interest Payment Dates

Both Series E/EE and I savings bonds pay interest monthly, which means that whether you cash them out the day after the interest is added to the bond or the day before the next interest payment, the bond is worth the same. For example, assume your savings bond makes the interest payments on the first of every month. Whether you cash it in on January 2 or January 31, you get the same amount. However, if you wait until February 1, you get another month of interest.

Taxes Due

One of the benefits to investing with savings bonds is that you can choose not to have any of the interest on the bond taxed until you cash in the bonds. When you cash in the bonds early, you will owe interest on all of the interest accrued while you owned the bond. For example, if you held the bond for eight years and during that time the bond accrued $1,000 of interest, the entire $1,000 is taxable in the year you cash it in.

Tax Reporting

At the conclusion of the year you cash in your bonds, you will receive a Form 1099-INT that shows the amount of interest you need to include on your income taxes, but only if you earned at least $10 in interest. Box 3 shows the amount of interest paid. On your income taxes, the interest is included as part of your interest income for the year. There are no additional early withdrawal tax penalties when you file your tax return.

About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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