Interest penalty for cashing Savings Bonds before five years
Friday, August 6th, 2004
Categorized as: Cashing in US Savings Bonds
I am cashing Series EE Savings Bonds and I want to cash the ones with the worst interest. I looked them up and noticed that some bonds have a three-month interest penalty. What does the penalty mean and does it affect my taxes? Do these bonds still carry the college education tax exemption?
Tom's response
The interest penalty just means that you lose the most recent three months worth of interest if you cash a bond before five years.
The penalty has no effect on your taxes or the education deduction. Our Savings Bond Calculator shows redemption values. This means any penalty has already been deducted from the current value the calculator gives you.
Your strategy of starting with the worst interest rates is sound. If you work your way up into the bonds that are less than five years old, cash the newest ones first, with the goal of getting as many of them past the five-year date as you can, thus avoiding the three-month interest penalty.
My book, Savings Bond Advisor gives an Alert Recommendation for every issue of Savings Bond. You can also use these recommendations to decide which bonds to cash first.
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If i have I bonds that I want to cash on 3/1 that is less than 5 years old. Am I correct that I lose the last 3 months interest. If so, which 3 months interest will I lose in this example, is it March, February and January's interst, or is it Feb, Jan and December'05?
Also, Is there a way to determine what the interest rate is for the 3 months being unearned. For example, if I want to choose between bonds that have the same Fixed rate, but some were purchased in October and some November am I correct to assume that they are on different cycles and the rate different may be substantial if there was a large uptick in the inflation component?
If you redeem on March 1, you lose the interest for Dec, Jan, and Feb.
For those three months, I bonds issued in October of any year earned an inflation component of 3.58% while I bonds issued in November of any year earned an inflation component of 5.69%.
Because rates for each individual bond are adjusted on a six-month cycle, I bonds issued in October don't begin to earn the inflation rate announced on November 1 until April.
If the fixed rate on your October and November I bonds is the same, it would make more sense to redeem the October issues.
I wish to redeem bonds bought 17 November 2005. When is the first date I can redeem than and have the penalty based on the current rate and not on the one in effect last November?
Can I redeem tham at my bank?
I bought $30,000 I Bonds on 17 November 2005. What would their value before penalty on September 1,2006, and how much would the penalty to be deducted from that be?
Joan - the first day you can redeem your I bonds is Nov 1, 2006.
At that point you will have earned 6.73% for six months and 2.01% for six months - about $1,320. The early withdrawal penalty will be three months of 2.01% and your interest earnings after penalty will be $1,164.
Keep in mind a new interest rate for your I bonds will also be announced on Nov 1. It will be much higher than the 2.01% rate you're earning now.
Read How to cash in a savings bond to learn where to redeem your Savings Bonds.
Hello, Tom
I am recently divorced. I received my ex-wife's savings bonds as part of our divorce settlement.
She has signed her name on the back of the bonds(EE Bonds). What am I required to do to cash these bonds? I am named as co-owner POD, also.
David - Much of the info you're looking for, as well as a couple of things you haven't thought of yet, is in my post about splitting Savings Bonds after a divorce.
If you can get your ex-wife to have her signature on the PDF 4000 form (mentioned in that post) certified at a bank, that will expedite the transfer to you.
Tom Adams
My husband and I want to cash our EE bonds in for our children's college tuition. We don't believe there is a penaly when we file taxes because of us using them for college. How do we prove that is what we used them for?
Jill - The limitations and other info about this deduction are here.
Tom Adams