How to Cash in Savings Bonds
Savings bonds are a popular investment option for many people, offering a safe and reliable way to save money and earn interest over time. If you're looking to cash in savings bonds, it's important to understand the process and make informed decisions to maximize your returns. In this blog post, we'll explore the steps on how to cash in savings bonds, including the different types of savings bonds, the eligibility requirements, tax implications, and tips for getting the most out of your investment.
What are savings bonds?
Savings bonds are debt securities issued by the U.S. Department of the Treasury to help fund the federal government's borrowing needs. They are considered one of the safest investments available, as they are backed by the U.S. government. There are two main types of savings bonds: Series EE and Series I.
Series EE bonds are typically purchased at face value and earn a fixed interest rate for up to 30 years. Series I bonds, on the other hand, are inflation-protected and earn a combination of a fixed rate and an inflation rate that is adjusted every six months based on changes in the Consumer Price Index for All Urban Consumers (CPI-U).
Eligibility requirements
To cash in savings bonds, you must meet certain eligibility requirements. The minimum holding period for savings bonds is one year, which means you cannot cash them in before 12 months from the issue date. However, if you redeem savings bonds before five years, you will not receive the last three months of interest. This means that it's generally best to hold onto savings bonds for at least five years to maximize your returns.
You must also be at least 18 years old and have your name listed on the savings bond as the owner or co-owner. If you're cashing in savings bonds that were given to you as a gift or inherited from someone else, you may need to provide additional documentation, such as a death certificate or proof of inheritance.
The process of cashing in savings bonds
Cashing in savings bonds can be done online or by mail, and the specific steps may vary depending on whether you have electronic or paper bonds.
For electronic savings bonds:
Log in to your TreasuryDirect account, which is the online
system for managing savings bonds.
Select the "ManageDirect" tab and choose
"Savings Bonds."
Follow the instructions to select the bonds you want to cash
in and provide the necessary information, such as your bank account details for
direct deposit.
Review the information and submit your request.
Wait for the funds to be deposited into your bank account,
which usually takes one to two business days.
For paper savings bonds:
Download and complete Form PD F 1522, which is the
"Savings Bond Redemption" form, from the U.S. Department of the
Treasury's website, or pick up a copy at your local bank or financial
institution.
Provide your personal information, including your Social
Security number, contact details, and bank account information for direct
deposit.
Sign the form and have your signature certified by a bank or
financial institution, or by a certified notary public.
Mail the completed form, along with your paper savings
bonds, to the address listed on the form.
Wait for the Treasury Department to process your request and
send you a check for the redeemed amount.
Tax implications
When you cash in savings bonds, you will need to report the
interest earned on your federal income tax return for that year, unless you
have previously reported the interest annually. Savings bond interest is
subject to federal income tax but is exempt from state and local taxes.
However, if you use the proceeds from savings bond redemption to pay for
qualified higher education expenses, you may be able to exclude the interest
from your federal income tax.
It's important to keep track of the interest earned on your
savings bonds and report it accurately on your tax return to avoid any issues
with the IRS. You will receive a Form 1099-INT from the Treasury Department,
which will detail the amount of interest earned and should be used when preparing
your tax return.
Types of Savings Bonds and How to Cash Them In
There are two main types of savings bonds currently available: Series EE bonds and Series I bonds. Here's an overview of these types of savings bonds and how to cash them in.
Series EE Bonds: Series EE bonds are a type of savings bond
that is sold at face value and earns a fixed rate of interest for the life of
the bond. These bonds are typically purchased at half of their face value, and
they mature after 20 years. However, they can continue to earn interest for an
additional 10 years after the maturity date, for a total of 30 years. Series EE
bonds can be cashed in before maturity, but if you cash them in before 5 years,
you will lose the last 3 months of interest. Series EE bonds are available in
both paper and electronic form, and they can be purchased online through the
TreasuryDirect website or through a financial institution.
To cash in Series EE bonds, you can do so through several methods:
a. TreasuryDirect: If you have electronic Series EE bonds, you can cash them in online through your TreasuryDirect account. The proceeds will be deposited directly into your linked bank account.
b. Financial Institution: If you have paper Series EE bonds, you can cash them in at a local bank or credit union that provides savings bond redemption services. You will need to sign the bonds and provide identification, such as a driver's license or passport. The financial institution will verify the bonds and provide you with the proceeds, which can be paid in cash or credited to your bank account.
c. Mail-in Redemption: If you prefer, you can also mail your paper Series EE bonds directly to the Treasury Department for redemption. You will need to complete and sign the appropriate form, which can be found on the TreasuryDirect website, and mail it along with the bonds to the designated address. The Treasury Department will then mail you a check for the proceeds.
Series I Bonds: Series I bonds are a type of savings bond
that earns interest based on a combination of a fixed rate and an inflation
rate that is adjusted every six months. These bonds are designed to protect
against inflation and provide a potential higher return compared to Series EE
bonds. Series I bonds are also available in both paper and electronic form, and
they can be purchased online through the TreasuryDirect website or through a
financial institution.
To cash in Series I bonds, you can follow similar methods as Series EE bonds:
a. TreasuryDirect: If you have electronic Series I bonds, you can cash them in online through your TreasuryDirect account. The proceeds will be deposited directly into your linked bank account.
b. Financial Institution: If you have paper Series I bonds, you can cash them in at a local bank or credit union that provides savings bond redemption services. You will need to sign the bonds and provide identification, and the financial institution will verify the bonds and provide you with the proceeds.
c. Mail-in Redemption: Alternatively, you can also mail your
paper Series I bonds directly to the Treasury Department for redemption. You
will need to complete and sign the appropriate form, which can be found on the
TreasuryDirect website, and mail it along with the bonds to the designated
address. The Treasury Department will then mail you a check for the proceeds.
Series HH bonds
Series HH bonds are another type of savings bond that was issued by the U.S. Treasury Department, but they are no longer available for purchase as they were discontinued in 2004. However, if you have existing Series HH bonds, they can still be cashed in according to the rules and regulations that were in place when they were issued.
Series HH bonds are unique in that they pay interest every six months, and the interest is directly deposited into your bank account. The interest earned on Series HH bonds is subject to federal income tax, but it is exempt from state and local taxes.
To cash in Series HH bonds, you can do so through the following methods:
Financial Institution: If you have paper Series HH bonds, you can cash them in at a local bank or credit union that provides savings bond redemption services. You will need to sign the bonds and provide identification, and the financial institution will verify the bonds and provide you with the proceeds.
Mail-in Redemption: Alternatively, you can also mail your paper Series HH bonds directly to the Treasury Department for redemption. You will need to complete and sign the appropriate form, which can be found on the TreasuryDirect website, and mail it along with the bonds to the designated address. The Treasury Department will then mail you a check for the proceeds.
It's important to note that like Series EE and Series I
bonds, Series HH bonds may have restrictions on when they can be cashed in
without incurring penalties or losing interest. It's essential to review the
specific terms and conditions of your Series HH bonds or contact the U.S.
Treasury Department for guidance on how to cash them in.
Tips for maximizing your savings bond redemption
Here are some tips to help you get the most out of your savings bond redemption:
Check the current interest rates: Savings bond interest rates change periodically, so it's important to check the current rates before cashing in your bonds. If you have Series EE bonds that were issued before May 2005, they earn a fixed rate for the life of the bond and may have a higher interest rate than newer bonds. Series I bonds, on the other hand, have a combination of fixed and inflation-based rates that are updated every six months. By checking the current rates, you can determine if it's the right time to cash in your bonds or if it's better to hold on to them for a longer period to earn more interest.
Consider timing for tax purposes: If you're planning to cash in savings bonds and the interest earned is a significant amount, you may want to consider the timing for tax purposes. For example, if you're in a higher tax bracket this year and expect to be in a lower tax bracket next year, you may want to delay cashing in your bonds until the following year to reduce your tax liability. Consulting with a tax professional can help you make the best decision based on your individual circumstances.
Use savings bonds for education expenses: As mentioned earlier, savings bond interest can be tax-free if used to pay for qualified higher education expenses. If you have children or grandchildren who will be attending college or other qualified educational institutions, you may want to consider using savings bond proceeds to cover these expenses, as it can provide a tax advantage. However, it's important to understand the rules and limitations of using savings bond proceeds for education expenses, so be sure to consult with a tax professional for guidance.
Evaluate other investment options: While savings bonds are a safe investment, they may not always provide the highest returns compared to other investment options. If you're looking to grow your money more aggressively, you may want to evaluate other investment opportunities, such as stocks, mutual funds, or real estate. It's important to diversify your investment portfolio and consider your risk tolerance, time horizon, and financial goals when making investment decisions.
Keep your savings bonds safe: Savings bonds are physical
documents, and if lost, stolen, or destroyed, they may be difficult or
impossible to replace. Therefore, it's crucial to keep your savings bonds in a
safe place, such as a safe deposit box, and make copies or digital records of
the bonds and any related documents. If you do happen to lose a savings bond or
it's damaged, you can file a claim with the Treasury Department to replace it,
but the process can be time-consuming and require additional documentation.