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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FDIC Insured Certificates of Deposit can pay 1 or 2% more than savings bonds when held for a similar length of time. See top CD Rates Below:


On February 22nd, 2006 tom wilson said:

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?

On February 22nd, 2006 Tom Adams said:

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.

On August 28th, 2006 Joan Mihay said:

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?

On August 28th, 2006 Tom Adams said:

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.

On October 19th, 2009 David Ray said:

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.

On October 19th, 2009 Tom Adams said:

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

On October 31st, 2009 Jill said:

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?

On November 2nd, 2009 Tom Adams said:

Jill – The limitations and other info about this deduction are here.

Tom Adams

On April 23rd, 2010 Tj said:

I got a 3 year old bond ee its worth 50 face value how much would I get.

On April 26th, 2010 Tom Adams said:

TJ – use the calculator at the top of this page to figure out the redemption value of your bonds.

Tom Adams

Comments Closed

June 1, 2010

After six years, over 400 posts, 3,680 real comments, and over 90,000 spam comments (thank you, Akismet, for making managing a blog with comments possible), I am closing public comments on I will contine to update the main articles on this site, but not the comments.

Virtually every question about Savings Bonds has been asked and answered on this site multiple times. Use the search feature (see the box in the gray area near the top of this page) or the detailed menu on the lower part of the home page to find the information you're looking for. If you have a copy of Savings Bond Advisor, you can ask me a question here.

Tom Adams

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