Savings bonds can be a great way to diversify your finances and protect your money from market risk, or you might have received one as a gift. However, the redemption process is different from just withdrawing money from a bank account, and it’s important to know how to do it. The steps for cashing in a savings bond vary depending on the type you have.
How Does a Savings Bond Work?
Savings bonds are securities issued by the government to fund its borrowing needs, such as federal expenditures or operations costs, according to Steve Sexton, founder and president of Sexton Advisory Group. “When you buy a savings bond from the government, you’re essentially giving them a loan that they promise to pay back, with compound interest, by a given date,” he says. “Because savings bonds are backed by the government, they’re considered as relatively low-risk compared to stock market investments.”
James Philpot, an associate professor and founder of the financial planning program at Missouri State University, adds that savings bonds have much lower initial investment requirements than many other investments – you can buy one for as little as $25 and collect interest for up to 30 years.
To buy a savings bond, Philpot says most investors open an account at TreasuryDirect.gov. “For someone who is accustomed to online banking, (this site) will look and feel very much like an online bank account,” he says.
Financial institutions no longer issue paper bonds; you can now only purchase one by using your tax refund.
How Much Is My Savings Bond Worth?
To view the current value of an electronic savings bond, simply log into your TreasuryDirect account. You’ll see a summary of the securities you own, and you can click through on the particular bond you want to look up to see its current value.
To figure out how much a paper savings bond is worth, you can use the savings bond calculator provided by the Treasury Department. The calculator will ask you for the bond serial number and issue date, so you’ll need to have that information handy.
Types of Savings Bonds and How to Cash Them In
Many types of savings bonds have existed throughout the decades. Today, there are three main types that are still active and generating interest. If you own one or more of these bonds and want to cash them in, read on for instructions.
Series EE Savings Bonds
Paper Series EE savings bonds were issued between 1980 and 2012. There were also some paper EE bonds sold between 2001 and 2011 that say “Patriot Bond” on them, which were a special edition to fund anti-terrorism efforts. These special Series EE bonds work the same as all other Series EE bonds.
Today, EE bonds can only be purchased electronically. The Treasury guarantees that any Series EE bond you buy now will double in value in 20 years. That said, you can cash in an EE bond any time after owning it for at least one year. You will forfeit three months of interest if you cash in the bond within fewer than five years.
If you want to cash in an electronic Series EE bond, you don’t have to redeem the full value – any amount of $25 or more is allowed. If you do cash a portion of the bond, you must leave at least $25 in your account. You will also only receive interest on the part you cash.
To cash in an electronic Series EE bond, log in to your TreasuryDirect account, then navigate to ManageDirect. You can then follow the link for cashing securities.
If you want to cash in a paper bond, you have to redeem it for the full value. This can be done at a bank that cashes bonds, or through the Treasury Department. If you opt for the latter, you’ll need to fill out an FS Form 1522. If the value you’re cashing is more than $1,000, you’ll also need to have your signature certified. Then send the bond and the form to the address listed on it.
Series I Savings Bonds
Series I savings bonds are designed to protect your money from inflation. These bonds earn both a fixed interest rate and a rate that changes based on inflation. Twice a year, the Treasury sets the inflation rate for the next six months. These bonds can be purchased electronically, or in paper form by using your tax refund.
Like Series EE bonds, Series I bonds can be cashed after 12 months. If you cash it within five years, you lose the last three months of interest.
The instructions for cashing in an I bond are the same as for EE bonds. You can redeem any amount of $25 or more by logging in to your TreasuryDirect account. To cash a paper bond, you’ll need to redeem it for the full value by sending in an FS Form 1522 along with your paper bond.
Series HH Savings Bonds
Series HH savings bonds were sold from 1980 through August 2004. Even though you can’t buy an HH savings bond anymore, you could own one that’s still paying interest. Series HH bonds earn interest for up to 20 years, which means the last ones will stop earning interest in 2024.
HH bonds only exist in paper form and come in four denominations: $500, $1,000, $5,000 or $10,000. To cash one in, you’ll need to follow the same steps for cashing in a paper EE or I bond. That means filling out an FS Form 1522 and getting your signature certified, if necessary. These bonds can only be redeemed via direct deposit, so you’ll need a bank account where the Treasury Department can send the money.
Tax Implications for Redeeming U.S. Savings Bonds
U.S. savings bonds offer a few tax advantages, Philpot says.
For Series EE and I savings bonds, interest accrues and credits to your bond monthly. However, you don’t actually receive the interest until you redeem your bond, meaning you don’t pay income tax on the interest until you cash out. This is called tax deferral, and it increases the compound interest returns. Alternatively, you can choose to report the interest earned on a yearly basis and pay income taxes as you go (this option is required for Series HH bonds).
Philpot notes that when you cash your bond and collect your interest, that interest is not subject to state income tax.
A potential strategy to reduce the tax owed even further, Philpot says, is to cash out a bond and use the principal and interest to pay for qualified educational expenses for a dependent. Then the interest is not subject to federal income tax.
Is Now a Good Time to Cash in a Savings Bond?
The longer you hold your savings bond, the more interest it will earn, up to its maturity date. At the very least, you should hold a savings bond for five years so you aren’t penalized for cashing it in early. However, to maximize a bond’s fullest earning potential, it’s best to wait on cashing it in until it has reached maturity.