Early redemption of
U.S. Series I bonds
If I buy a U.S. Series I savings bond
and cash it in after five years, is there any penalty? I am confused when it says
that the maturity date is 30 years. -- Cindy
You can cash your Series I bonds with issue dates of January
2003 and earlier any time after six months and get your original investment plus
earnings. For Series I bonds with issue dates after February 2003, you can cash
them anytime after 12 months.
However, the bond
is designed to encourage long-term saving, so if you cash it in within five years
of the issue date you will forfeit three months' interest.
example, if you cash the bond after 24 months you will only receive 21 months'
interest. It's very much like the early withdrawal penalty for redeeming a certificate
of deposit (CD) before it's due.
The I bond pays such a nice
interest rate that, even with the penalty, it's a good savings vehicle. Visit
Treasury Bureau of the Public Debt Web site for the current Series I bond
rate, and Bankrate.com for
up-to-the-minute CD rates.
For more on U.S. savings bonds,
including Series I bonds, read the Diva's "5
common questions about savings bonds."
The Series I bond matures in 30
years; that means it earns interest for 30 years. After that, the earnings stop
and you have to bite the bullet and pay tax on 30 years of tax-deferred, compounded
earnings. The IRS says the tax is due when the bond matures, whether or not you
cash it in.
The Diva reminds you that slapping a large chunk
of interest income on a tax return can have serious consequences. It can push
you into a higher tax bracket, make part of your Social Security taxable, prevent
you from making an IRA contribution and reduce or eliminate the amount you can
deduct for personal exemptions and itemized deductions.
may get a break if you use the proceeds to pay for qualified
higher education expenses, but if your income is too high or you fail some
other eligibility test, you may not. Do some tax planning before you cash in your
Series I bonds -- especially if you've held them for a long period.
ROSEN has a master's degree in finance, with a specialization in accounting, from
the Kellogg Graduate School at Northwestern University in Evanston, Ill. Rosen
has more than 15 years of experience in the financial arena, serving in Illinois
and Florida as a certified public accountant, financial consultant, expert witness
and educator. She is owner of Dorothy Rosen, CPA, a public accounting firm that
serves individuals and small businesses.