What Happens When You Cash Out an I Bond? Key Rules and Tax Implications

Learn what happens when you cash out an I bond, including interest payout, penalties, and tax rules for early redemption.

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When you cash out an I bond, you receive the initial purchase amount plus the accumulated interest. It's important to note that if you redeem the bond before five years, you lose the last three months of interest. Interest earned on I bonds is subject to federal income tax but exempt from state and local taxes. Additionally, using the bonds for qualifying educational expenses can make the interest tax-exempt.

FAQs & Answers

  1. What happens if I cash out an I bond before five years? If you redeem an I bond before five years, you forfeit the last three months of interest earned as a penalty.
  2. Are I bond earnings subject to state and local taxes? No, the interest earned on I bonds is exempt from state and local taxation but is subject to federal income tax.
  3. Can I bond interest be tax-exempt? Yes, interest on I bonds can be tax-exempt if the bonds are used for qualified educational expenses.

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For more insights on managing your savings bonds and maximizing your returns, explore our related videos on U.S. savings bonds, tax strategies for investors, and how to use I bonds for education funding.

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