Paper savings bonds have been a reliable and popular investment for decades, particularly in the United States. Whether they were given as gifts, purchased as part of a savings plan, or used for education expenses, many people still hold these bonds today. However, with the U.S. Treasury having moved to electronic bonds in 2012, some bondholders may be unsure of how to cash their paper bonds when the time comes.
This guide will walk you through the process of cashing paper savings bonds, step by step, from understanding their value to the tax implications of redeeming them.
What Are Paper Savings Bonds?
A paper savings bond is a government-issued debt security, designed to be a safe, long-term savings instrument. Bonds are purchased at a fraction of their face value and increase in worth over time due to accrued interest. They are backed by the U.S. government, making them a low-risk investment option.
There are two main types of U.S. savings bonds:
Series EE Bonds: These bonds are sold at face value and earn a fixed rate of interest over time. They are guaranteed to double in value if held for 20 years.
Series I Bonds: These bonds are sold at face value and earn a combination of fixed interest and a variable rate tied to inflation, offering protection from rising costs.
Although savings bonds are now issued electronically, many people still hold paper bonds from before 2012. When the time comes to cash these bonds, it’s important to know the correct steps and requirements.
Who Can Cash a Savings Bond?
The Bond Owner
Only the person or entity whose name appears on the bond is eligible to cash it. If the bond lists more than one person, any of the named owners can redeem it.
Co-Owners
In cases where the bond has two co-owners, either person can cash the bond without needing the permission of the other. Co-ownership is common when savings bonds are purchased as gifts or for joint savings plans.
Beneficiaries
If the bond lists a beneficiary (someone designated to receive the bond upon the owner’s death), the beneficiary can redeem the bond by providing proper documentation, such as a death certificate and identification.
Legal Representatives
If a bondholder is incapacitated or deceased, the executor of their estate or someone with a power of attorney may also redeem the bond, provided they can show appropriate legal authority.
When Can You Cash a Paper Savings Bond?
Maturity Rules
Savings bonds cannot be cashed immediately after purchase. Each bond type has a specific period before it becomes redeemable:
Series EE Bonds can be cashed after 12 months but reach full maturity after 20 years.
Series I Bonds are also redeemable after 12 months but continue to earn interest for up to 30 years.
It is essential to note that if you cash a bond within the first five years, you will lose the last three months of interest. However, after five years, there is no penalty, and you will receive the full value plus interest accrued.
Step-by-Step Guide on How to Cash Paper Savings Bonds
Cashing a paper savings bond is a straightforward process, but it does require following a few key steps to ensure everything is handled properly.
Step 1: Determine the Value of the Bond
Before cashing a bond, you should first determine its current value. Over time, bonds accrue interest, which means they may be worth significantly more than their original face value. You can easily check this using the TreasuryDirect Savings Bond Calculator.
To use the calculator, you will need:
- The bond series (e.g., EE or I)
- The issue date (found on the bond)
- The denomination or face value (the amount the bond was originally issued for)
This will give you an accurate estimate of how much the bond is worth, including all interest earned.
Step 2: Visit a Financial Institution
To cash a paper savings bond, you’ll need to visit a bank or credit union that handles this type of transaction. Not all financial institutions accept savings bonds, so it’s a good idea to call ahead and confirm.
Bring Identification: You will need a government-issued ID, such as a driver’s license or passport, to verify your identity.
Social Security Number: The bank may ask for your Social Security number (or taxpayer identification number) to process the redemption.
Step 3: Sign and Present the Bond
Once at the bank, you will need to sign the back of the bond to endorse it for cashing. You should wait to sign the bond until you’re in the presence of a bank representative, as this is a requirement for legal purposes.
If you’re cashing multiple bonds, be sure to have them all properly endorsed and ready to present to the bank.
Step 4: Receive Your Payment
After verifying your identity and ensuring the bond is eligible for redemption, the bank will issue your payment. Depending on the bank’s policies and your preference, you can receive the money as:
- Cash
- A cashier’s check
- A direct deposit into your bank account
The amount you receive will include both the original face value of the bond and any interest that has accumulated over the years.
Special Cases for Redeeming Savings Bonds
Cashing Bonds for a Deceased Owner
If you are the beneficiary or executor of an estate where the bondholder has passed away, additional documentation will be required to cash the bond. You will need:
A certified copy of the bondholder’s death certificate
Proof of your identity as the beneficiary or legal executor
Possible court documentation, such as a letter of administration or will, showing your authority to act on behalf of the estate
Redeeming Bonds for Educational Expenses
If you are cashing the bonds to pay for qualified higher education expenses, you may be able to exclude some or all of the bond’s interest from federal taxes. The educational institution must meet IRS requirements, and the bond must be used to pay for tuition or other qualified expenses.
see also: Can I Buy Foreign Stocks on E*TRADE?
Tax Implications of Cashing Savings Bonds
Interest earned on savings bonds is subject to federal income tax but is exempt from state and local taxes. There are two ways to manage this:
Report the Interest Annually: You can report the bond’s interest on your federal taxes each year.
Defer Reporting Until Redemption: Most people choose to defer paying taxes on the interest until they redeem the bond.
To report the interest, the bank will issue a 1099-INT form for the year in which you cash the bond. Be sure to include this in your tax return.
Conclusion
Cashing paper savings bonds is a relatively simple process, but it’s essential to follow the correct steps to ensure everything is handled smoothly. By understanding when and how to cash your bonds, as well as the potential tax implications, you can maximize the benefits of your investment. Whether you’re cashing a bond for personal use, as part of an estate, or for educational expenses, knowing the process will help you make informed decisions about your savings.
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