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What Is the 3-Month Interest Penalty for Redeeming I Bonds Early?

Learn about the 3-month interest penalty when cashing out I Bonds within five years and how it affects your returns.

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Video transcript

Ibonds have a 3-month interest penalty if redeemed within the first five years. For example, if you cash out an Ibond at 12 months, you receive only the first 9 months of interest. This encourages long-term investment, offering better returns if held for a longer duration.

Questions and answers

  1. What happens if I redeem I Bonds before 5 years?

    If you redeem I Bonds before five years, you forfeit the last three months of interest as a penalty.

  2. How is the 3-month penalty on I Bonds calculated?

    The 3-month interest penalty means you lose the interest earned during the last three months before redemption.

  3. Can I avoid the 3-month penalty on I Bonds?

    The penalty applies to all redemptions within five years, so the only way to avoid it is to hold the bonds for at least five years.

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To better understand how to maximize your savings with I Bonds and other government-backed investments, explore our related videos on I Bond interest calculations, tax implications, and the benefits of holding bonds long term.