Cashing I bonds before five years: what the penalty costs
An I bond cannot be cashed in its first 12 months. After that and until its fifth anniversary, the Treasury keeps the last 3 months of interest. The calculator puts a dollar figure on it for your bond.
If you cash it this month
$11,324.00
The last three months of interest ($120.00) are taken off. From May 2028 nothing is.
| Interest you keep | $1,324.00 |
| Penalty, three months of interest | $120.00 |
| Rate now | 4.26 % |
| Penalty ends | May 2028 |
| Value in May 2028 (at today’s rate) | $12,232.00 |
Worked out by Radif Partners · How we calculate · rates read on treasurydirect.gov and fiscaldata.treasury.gov · not personal financial advice
The early redemption penalty on an I bond is the interest of the last three months before you cash it. It applies from the 13th month to the end of the fifth year; before 12 months the bond cannot be cashed at all, and after five years there is no penalty. The amount depends on the bond's current rate and size. A $10,000 electronic I bond bought in May 2023 is worth $11,324.00 if cashed in October 2026; the penalty already deducted is $120.00, about three months at 4.26 % a year, and it stops applying in May 2028. The penalty never takes the value below what you paid. Electronic bonds can be cashed in part, so a holder can take out what is needed and leave the rest, as long as at least $25 remains. Interest received is reported for federal tax in the year you cash.
Five bonds cashed this month
The table cashes five $10,000 electronic I bonds bought at different dates, on the first of October 2026. The penalty column is the interest the Treasury keeps; the last column is the month when the penalty no longer applies. A bond that is not yet 12 months old shows no value because it cannot be cashed.
| Bought | Paid if cashed now | Penalty | No penalty from |
|---|---|---|---|
| January 2022 | $12,264.00 | $100.00 | January 2027 |
| November 2022 | $11,524.00 | $108.00 | November 2027 |
| May 2023 | $11,324.00 | $120.00 | May 2028 |
| November 2024 | $10,668.00 | $120.00 | November 2029 |
| November 2025 | not yet | November 2030 |
The penalty is small next to the interest a bond from 2022 has earned at the high rates of that year, and larger, relative to interest, on a recent bond. It is always three months of whatever rate the bond is earning now, not three months of the rate it earned when it was bought.
Penalty on your own I bond
If you cash it this month
$9,126.00
| Interest you keep | $1,626.00 |
| Penalty, three months of interest | $72.00 |
| Rate now | 3.34 % |
| Penalty ends | April 2027 |
The rules in the regulation
Under 31 CFR 359 an I bond may be redeemed at any time after 12 months from its issue date. A bond redeemed less than five years after issue is paid with a reduction of three months of interest (31 CFR 359). TreasuryDirect describes the same rule on its I bond page: you can cash the bond after one year, but if you cash it before five years you lose the last three months of interest (TreasuryDirect, I bonds). The issue date is the first day of the purchase month, so a bond bought on May 28, 2023 counts as a May 1, 2023 bond: cashable from May 1, 2024, and free of the penalty from May 1, 2028.
Interest is credited on the first day of each month, which matters for the timing of a redemption. Cashing on the last day of a month gives nothing for that month; waiting until the 1st adds a month of interest. Near the fifth anniversary, waiting a few days can remove the penalty altogether.
Cashing part of a bond
An electronic bond in TreasuryDirect can be redeemed in part. Taking $3,000 out of the $10,000 bond from May 2023 cashes 30 % of it, with the same share of the penalty, and the remaining $7,000 of principal keeps earning with its original fixed rate and dates. The amount left must be at least $25. Paper bonds do not allow it: a paper I bond is cashed whole at a bank or by mail, or first converted into an electronic bond, which can then be cashed in part. The cashing page covers the steps.
Disasters and other exceptions
The 12-month lock has one published exception. Owners living in an area with an official disaster declaration can cash savings bonds even when they are less than a year old, and even when paper bonds are lost or damaged, under the Treasury's disaster procedures (TreasuryDirect, affected by a disaster). The three-month penalty before five years still applies to those redemptions. For a bond that passes to someone at the owner's death, the inherited bonds page explains who may cash it.
Where the penalty shows up
The penalty is not a separate charge on a statement. TreasuryDirect simply displays and pays the reduced value, and the Form 1099-INT reports the interest actually paid, net of the three forfeited months. Someone who compares the current value in the account with a value computed from the rate alone will see the difference and may think the bond is underpaid. The calculator separates the two figures for that reason, and shows the month from which the full value is paid.
Penalty against a new rate
Some holders cash an older bond to buy a new one when the new composite rate is higher. The arithmetic has three parts: the penalty in dollars, the difference in rate over the time you plan to hold, and the purchase limit of $10,000 a year, which caps what can be bought back. New bonds bought from May to October 2026 earn 4.26 % with a fixed rate of 0.90 %; your bond's own rate is on the I bond rates page, and the fixed rate of its window in the fixed rate history. A new bond also restarts the 12-month lock and the five-year penalty clock.
Tax is the fourth part. Cashing brings the deferred interest into the current year's federal return; a bond kept until a lower-income year, or used for tuition under the education exclusion, may cost less tax. The tax page gives the rules.