What Happens If You Cash in a Savings Bond Too Early?

Savings bonds represent a relatively "safe" investment, but it takes a long time to reap the full benefits. You can expect to double your money if you hold the bonds for 20 years, but they continue to earn interest for up to 30 years. Cashing in early is a possibility, but you can lose some of the benefits.

You cannot cash in a bond if you have owned it less than 1 year. After this point, you can cash it in, but if it's been less than 5 years, you'll give up the last 3 months' worth of earned interest. When cashing in this early, expect to receive very little over face value on electronic bonds and a bit over half the value of paper bonds.

Though you buy electronic bonds and paper I bonds at full face value, you buy paper EE bonds at half the face value. It takes 20 years for a paper EE bond to reach its face value. When cashing it in early, you may be surprised by the amount of money that you receive, since it is less than the face value. Electronic or paper I bonds will also double in value over 20 years, though it's not as confusing because the amount you'll receive if cashing in early is still over the face value.

After 20 years, the bond will reach its original maturity, but it can continue to earn interest for another 10 years. If you cash it in early, you forgo those extra years of interest.

The government applies interest to your bonds either monthly or every 6 months, typically applying the previous month's interest at the very beginning of the current month. If you were to cash your bond in at the end of the month, you will miss out on the interest you were supposed to earn for that month. Ask when interest is applied and cash the bond in soon after that time period.

No matter when you cash in your bond, you'll have to pay taxes on the interest you earned. The bank will report this on a 1099-INT form, which you'll receive at the beginning of the year.