-advertisement -

Early redemption of U.S. Series I bonds

Dorothy Rosen -- The Dollar DivaDear Dollar Diva,
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

Dear 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.

- advertisement -

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.

For 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 the U.S. 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."

Maturity date
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.

You 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.

DOROTHY 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.

-- Updated: May 18, 2005:





30 yr fixed mtg 3.73%
48 month new car loan 3.18%
1 yr CD 0.55%

Mortgage calculator
See your FICO Score Range -- Free
How much money can you save in your 401(k) plan?
Which is better -- a rebate or special dealer financing?

Begin with personal finance fundamentals:
Auto Loans
Credit Cards
Debt Consolidation
Home Equity
Student Loans

Ask the experts  
Frugal $ense contest  
Form Letters

- advertisement -
- advertisement -