When to Cash an I Bond: the Lock and the Penalty

An I bond cannot be redeemed for the first 12 months¹ after its issue date. A redemption in months 12 through 59 forfeits the last 3 months of interest². From month 60 onward a redemption forfeits nothing.

The I bond calculator applies both rules to one issue month and shows which band a bond is in today. This page explains the rules behind that answer.

The three windows

TreasuryDirect states the holding rule directly: “You can cash in (redeem) your I bond after 12 months.” The penalty rule sits next to it: “if you cash in the bond in less than 5 years, you lose the last 3 months of interest.”

Age of the bond	Redemption allowed	What the redemption gives up
Months 0–11	No	Not applicable
Months 12–59	Yes	the last 3 months of interest2
Month 60 through year 30	Yes	Nothing
After 30 years3	Yes	Nothing; the bond has stopped earning interest

Age is counted from the issue date, not from the day the money left your bank. For a savings bond the issue date is “the first day of the month in which the Treasury receives funds for the purchase of the security.” A bond paid for on August 20 therefore carries an August 1 issue date and reaches month 12 on the following August 1.

What the penalty costs

The penalty is three months of interest, not three months of principal. It is charged at whatever composite rates were in force during those three months, so its size moves with the rate.

Example. A hypothetical bond holds $2,000 and is earning an annualized 4.00%. Three months of interest is $2,000 × 4.00% × 3 ÷ 12, or about $20. The same bond earning an annualized 2.00% would forfeit about half that.

That arithmetic is why the penalty is cheaper when a bond is inside a low-rate six-month period. A bond’s own rate periods run six months from its issue month, not from May and November. TreasuryDirect puts it this way: “the date when the rate changes for your bond is every 6 months from the issue date of your bond.” The composite rate for each period is set by the formula fixed rate + 2 × semiannual inflation + (fixed × semiannual inflation ÷ 100), floored at 0%⁴, and the I bond rate history lists every period since 1998.

Where the penalty already appears

The value TreasuryDirect shows you is not a gross figure. “For bonds less than 5 years old, values shown in TreasuryDirect and the Calculator don’t include the last 3 months of interest.” The penalty has already been subtracted from the number on the screen.

One consequence follows for anyone comparing accounts. A bond that has just passed its fifth birthday appears to jump in value, because three months of interest that were being withheld from the display are added back. Nothing was paid to you at that moment; the display stopped netting the penalty.

Interest is added monthly, not daily

I bonds earn interest monthly and compound it twice a year. TreasuryDirect describes the crediting as: “Twice a year, we add all the interest the bond earned in the previous 6 months to the main (principal) value of the bond.” Between those two dates the bond still accrues monthly.

Because accrual is monthly rather than daily, a bond does not gain value on every calendar day. Your TreasuryDirect account shows the next accrual date for each bond, which is the next date on which its value increases.

When can I cash an I bond?

Twelve months after the issue date, and not before. TreasuryDirect’s wording is “You can get your cash for an EE or I savings bond any time after you have owned it for 1 year.”

How much is the I bond early withdrawal penalty?

Redeeming before five years costs the last 3 months of interest² on the amount redeemed. There is no separate fee and no reduction of principal; only interest is forfeited.

Does the penalty still apply after five years?

No. From month 60 onward an I bond can be redeemed in full or in part with no interest forfeited. The five-year mark is measured from the issue date, so a bond issued in March reaches it on March 1 five years later.

What is the best month to cash an I bond?

The arithmetic favors a month where the three months being forfeited were low-rate months and the months already banked were high-rate months. Because each bond’s rate periods run from its own issue month, that month differs from bond to bond, which is what the I bond calculator works out.

What happens if I never cash the bond?

An I bond stops earning interest 30 years³ after its issue date. The interest becomes reportable for federal income tax in the year of final maturity even if the bond is left untouched, which the I bond tax rules set out.

Can I redeem part of an I bond?

Yes, for electronic bonds held in TreasuryDirect. A partial redemption is for any amount of $25⁵ or more to the penny and must leave at least that much in your account; a paper bond “must be cashed for its entire value.”