9 Common Mistakes People Make When Cashing in Savings Bonds

Savings bonds are government-backed investments that earn interest over time. They're often used for long-term goals like education or retirement, and while they're considered low-risk, redeeming them can be trickier than it seems.

If you're hoping to boost your bank account by cashing in some of your matured bonds, it's important to avoid common mistakes that could delay your payout or reduce your return. Let's go over some of the most frequent missteps people make when cashing savings bonds.

Not redeeming a paper bond for its full value

Unlike electronic bonds, paper bonds cannot be partially cashed, so you always have to redeem your bond for the full amount. To do this, you'll need to visit a bank that handles bond redemptions, and most require a valid ID.

Those who want to skip the lines at the bank may be able to redeem their bonds by filling out FS Form 1522 and mailing it directly to the Treasury. Of course, this could make it take a little bit longer to get your funds so it may not be a good option for anyone in a hurry.

Forgetting to check if the bond has fully matured

Many people cash in bonds too early, missing out on potential interest. Most Series EE bonds issued after 1980 earn interest for up to 30 years. You can check maturity dates using the TreasuryDirect Savings Bond Calculator. If the bond hasn't fully matured, you might be leaving money on the table by redeeming it too soon.

Just remember, you cannot redeem a partial value and then hold out for the rest later.

Using the wrong redemption form

If you cannot redeem your bond in-person, you'll need to submit FS Form 1522, or FS Form 1455 if the previous owner is deceased.

These forms must be signed and sometimes notarized, and then mailed to the Treasury Department with proof of identity and ownership. Not using the correct form or failing to provide the correct proof can delay your redemption.

Overlooking penalties for early redemption

Series EE and I bonds can be cashed after 12 months, but redeeming them before five years means you may have to forfeit the last three months of interest.

Some are unaware of this penalty and assume that they'll get the full, current value. Keep up with how long you've held your bonds to avoid any unnecessary penalties like this one.

Not having a TreasuryDirect account for electronic bonds

Electronic bonds can only be managed and redeemed through a TreasuryDirect account. If you were gifted the bonds or inherited them, you'll have to make an account and link the bond to it.

This process can take a bit of time, as it requires identity verification and banking information, so plan ahead accordingly.

Misplacing paper bonds and assuming they're gone forever

Losing a physical bond doesn't necessarily mean that the money is just gone. Even though most people assume that you cannot cash a bond without the physical copy, you can request a replacement bond from the Treasury by submitting FS Form 1048.

You'll be asked to provide a lot of details, including approximately when the bond was issued and former information. It helps to keep a record of this information separately, just in case you do lose the bond.

Ignoring tax implications when cashing in

Interest earned on savings bonds is subject to federal income tax, but not state or local taxes. Many people forget to account for this, leading to surprises at tax time. The IRS will receive Form 1099-INT when you redeem a bond, and you'll need to report that income.

The tax bill can be significant if you hold this bond for decades.

Failing to correctly redeem bonds from a deceased owner

You cannot just cash a bond left by a relative. Instead, you have to transfer it or reissue it through the proper legal steps.

Often, this involves providing a death certificate, proof of identity, and submitting FS Form 5336 or FS Form 1455. Skipping this paperwork will lead to delays and outright rejections, and it's always easier to take care of this paperwork as quickly as possible.

Cashing all your bonds at once

If you have several bonds that you've held for decades, it generally isn't recommended to cash them all in at once, as doing so could push you into a higher tax bracket or reduce your eligibility for certain financial aid.

Instead, it's best to spread the redemptions over several years. Look at your overall financial picture and consider the timing of the interest income. A tax professional can help you create a smart strategy.

Bottom line

Cashing in savings bonds can seem like a pretty simple way to build your wealth on the surface, but there are lots of potential places to make mistakes. For instance, using the wrong form or redeeming too early can cost you time and money.

Paper and electronic bonds have slightly different redeeming rules, and that can make things extra confusing, too. Researching what you need to know before you redeem your bonds can help you avoid common mistakes, allowing you to access your money with ease.