Savings bonds are a secure investment backed by the complete trust and credit of the U.S. government, making them a long-term investment option. They offer a higher interest rate than several savings accounts, provided that you do not redeem them too early.
It is crucial to understand the timing of cashing in savings bonds to increase the interest earned and avoid losing out on it. The two commonly known savings bond types are Series EE and Series I, and there are specific guidelines that determine when and how they can be redeemed.
What are U.S. savings bonds?
U.S. savings bonds are a type of debt security issued by the federal government. The holder of a bond is essentially loaning the money to the government in exchange for modest — but guaranteed — returns down the road. These bonds are protected by the U.S. government, meaning that there’s no likelihood of the buyer losing their investment.
During World War II, the government required assistance in financing its military operations, and that is when the savings strategy emerged. Savers could purchase bonds at a value lower than their face value, which would mature over time and eventually be worth their face value along with interest.
Nowadays, the funds collected from the sale of bonds can be utilized for multiple purposes, including providing the government with operational cash flow or financing capital investments for projects such as highways, schools, and hospitals.
Types of savings bonds
When it’s time to redeem a savings bond, knowing which type you have — Series EE or Series I — is key. Though similar, they do differ.
| Series EE | Series I | |
|---|---|---|
| Purchase price | Face value | Face value |
| Interest earnings | EE bonds issued in May 2005 and after earn a fixed rate of return. EE bonds issued from May 1997 through April 2005 earn variable rates. |
A fixed-rate of return is known when you buy the bond and an inflation rate is calculated twice a year. |
| Guaranteed earnings timeline | Worth at least twice face value after 20 years; continues to accrue interest through 30th year | Interest accrues until bond reaches 30 years |
| Minimum purchase | $25 | $25 electronic, $50 paper |
| Maximum amount each calendar year | Up to $10,000 in electronic bonds | Up to $10,000 in electronic bonds, and using your tax refund up to $5,000 in paper bonds |
| Issue method | Electronically via TreasuryDirect | Electronically via TreasuryDirect, and paper bonds are issued by mail with your tax refund |
| Earliest bonds can be cashed | After 12 months | After 12 months |
| Early redemption penalties | Before five years, interest is forfeited from the previous three months. | Before five years, interest is forfeited from the previous three months. |
| Tax exemptions | Exempt from state and local taxes, federal income tax is deferred until bond matures or is cashed in. | Exempt from state and local taxes, federal income tax is deferred until bond matures or is cashed in. |
Both Series EE and I bonds have an interest-bearing life of 30 years, yet the way they earn interest is slightly different. Series EE bonds earn a set rate that’s established when you buy them.
The interest on Series I bonds is a combination of fixed and variable rates. The variable rates are adjusted semiannually — in May and November — and are based on inflation, which is determined by the Labor Department’s consumer price index.
Both Series EE and I bonds earn interest every month, and the interest is compounded semiannually.
When to cash in a savings bonds
Series EE and I bonds stop earning interest at 30 years, so waiting that long to cash them in ensures you get the maximum return. An additional advantage of waiting at least 20 years to cash in Series EE bonds is they’re required by law to double in value by the 20-year mark.
Like with a high-yield savings account, the longer you leave an interest-earning bond untouched, the more its value grows.
It might be a smart financial move to cash in a bond early, however, if you have fallen on hard times and want to avoid incurring additional debts — even if you haven’t earned maximum interest on the bond yet.
Series EE or I bonds can be redeemed after 12 months. Cashing them in before five years, however, will cost you the last three months of interest.
If you have an electronic version of either bond, you can check its current value on TreasuryDirect under the “current holdings” tab after making an account. If you have a paper bond, however, you can use TreasuryDirect’s paper bond savings calculator.
How to cash in a savings bonds
Electronic bonds
Electronic Series EE and I bonds that were purchased from TreasuryDirect can be redeemed on its website when you sign on to your account. The money from cashed-in bonds is directly deposited into your savings or checking account within two business days.
Paper bonds
Paper bonds can be redeemed at some bank branches. Call beforehand to verify your bank provides this service and to make an appointment, if needed.
You can also redeem paper bonds by completing FS Form 1522, and mailing the form and bonds to:
Treasury Retail Securities Services
P.O. Box 9150
Minneapolis, MN 55480-9150
Bottom line
Although redeeming your savings bonds can provide an instant cash injection, it is generally advisable to wait for the bond to reach maturity to obtain maximum benefits. However, if you are experiencing financial difficulties and seeking alternative ways to improve your cash flow, cashing in your savings bond may be a viable option, particularly if it prevents you from incurring debt.