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?
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.