When to Sell I Bonds: Penalties, Rate Resets, and Taxes

The best time to sell I bonds is after they’ve been held at least five years, cashed on the first business day of a month, and timed so you capture a full six-month rate period before a reset drops your yield. Series I savings bonds are locked entirely for the first 12 months, and any redemption before the five-year anniversary costs you the last three months of interest. Everything else about when to sell is a judgment call built on those two rules, your bond’s own rate cycle, and your tax year.

The First 12 Months Are Locked

Every I bond issued since February 2003 cannot be redeemed for one full year from its issue date. No early access, no transfer, no exceptions for changed circumstances.¹

The one narrow carve-out is a federal disaster waiver. When the Bureau of the Fiscal Service designates counties after a qualifying disaster, it can lift the 12-month minimum for bondholders there. In 2025, for instance, the Treasury waived the holding period for residents of several Tennessee counties hit by severe storms and tornadoes.² Absent that kind of declaration, the lockout is absolute.

The Three-Month Interest Penalty Before Year Five

p>Once you clear 12 months, you can cash out any time. But redeem before the five-year anniversary and the Treasury docks you the last three months of interest. The calculation rolls the clock back: sell at 18 months and you receive the value the bond would have had at 15 months.³

One floor protects your principal: the Treasury will never reduce a bond’s redemption value below what you paid. Even in a low-rate stretch, the penalty cannot eat into your original investment.³

The penalty applies uniformly regardless of the bond’s value or the current rate. At the five-year mark it disappears, and from then on you receive full principal plus all accrued interest with no deductions.⁴ If you can wait to that anniversary, wait.

When the Penalty Is Worth Paying

Three months of lost interest sounds painful, but sometimes it’s trivial. If inflation has dropped and your bond is now earning a composite rate near zero, three months of that near-zero rate is almost nothing. Giving up a few dollars of low-rate interest to move principal into a higher-yielding account can pay for itself within weeks.

The math is simple. Check your bond’s current composite rate on TreasuryDirect, estimate three months of interest at that rate, and compare that against what the same money would earn elsewhere in the same period. When savings account rates or Treasury bill yields sit well above your bond’s composite rate, the penalty is a rounding error. The people who lose the most on early redemption are those cashing out while their bond still carries a high composite rate.

Time the Sale Around Your Bond’s Rate Reset

I bond rates change every six months, but not on the Treasury’s announcement schedule. The Treasury sets new fixed and inflation rates each May 1 and November 1. Those apply immediately to newly purchased bonds. Your existing bond resets every six months from its own issue date. A bond bought in March resets in March and September, not May and November.⁵

That staggered schedule creates a timing lever. When the Treasury announces a lower inflation rate, look up your bond’s specific reset date. If your bond is still earning the previous, higher rate for another few months, hold through the end of that period and sell before the lower rate starts compounding.

The composite rate combines a fixed rate locked in for the life of the bond and a variable inflation rate tied to the Consumer Price Index for All Urban Consumers. Only the inflation component changes at each reset.⁶ For bonds issued between November 2025 and April 2026, the composite rate is 4.03% with a fixed rate of 0.90%.⁵

What Happens During Deflation

The composite rate can never go below zero. If the inflation component turns negative enough to pull the combined rate into negative territory, the Treasury stops it at 0%. Your bond’s value never decreases because of deflation, but it may stop growing for a stretch.⁵

A bond stuck at 0% is dead money. If it’s past the five-year mark, cash it out and redeploy the funds. If it’s still inside the five-year window, weigh the three-month penalty against the opportunity cost of leaving your money parked at zero.

Cash In Early in the Month

Interest accrues on the first day of each month. The Treasury calculates the interest your bond earned during a month and adds it to the bond’s value at the start of the next month.⁷ Redeem on March 2 or March 29 and the bond’s value is the same, because March’s interest won’t post until April 1.

So cash in on the first or second business day of the month. You capture the previous month’s interest credit and free the money to earn returns elsewhere right away. Wait until mid-month or later and the capital sits idle. It’s not earning bond interest that month, and it’s not earning anything anywhere else either.

Taxes at Redemption

I bond interest is subject to federal income tax but exempt from state and local income taxes.⁸ Most holders defer reporting the interest until they cash the bond or it matures. You don’t owe anything annually unless you affirmatively elect to report each year.

When you redeem, the Treasury or the bank that cashed the bond issues a Form 1099-INT reporting all the taxable interest. For electronic bonds cashed through TreasuryDirect, the 1099-INT appears in your account by January 31 of the following year.⁸

Because all the deferred interest lands in a single year, a large redemption can push you into a higher bracket. If you hold multiple bonds, stagger redemptions across calendar years to spread the tax hit. And if you know a lower-income year is coming, a gap between jobs, retirement, or a sabbatical, that’s often the cheapest time to cash in.

The Education Exclusion

You may be able to exclude I bond interest from federal income tax entirely if you use the redemption proceeds to pay qualified higher education expenses in the same year. The exclusion covers tuition and required fees at eligible colleges, universities, and vocational schools, as well as contributions to 529 plans.⁹

It’s not unlimited. The exclusion phases out at higher incomes based on modified adjusted gross income, with thresholds that adjust annually for inflation. The bondholder must have been at least 24 at the time the bond was issued, and the expenses must be for the bondholder, spouse, or a dependent. If total redemption proceeds exceed the qualifying expenses, only a proportional share of the interest qualifies.⁹

Don’t Hold Past 30 Years

I bonds reach final maturity 30 years after their issue date, a 20-year original maturity followed by an automatic 10-year extension.¹⁰ After that, the bond stops earning entirely. Electronic bonds in TreasuryDirect pay out automatically at maturity; paper bonds require you to act.⁴

Holding a matured bond is one of the most common mistakes. The value freezes while inflation keeps eroding purchasing power. Older paper bonds from the 1990s may have already matured or will soon. Check the issue date and cash them. There is no benefit to holding a bond that has stopped earning.

1
eCFR. 31 CFR Part 359 – Offering of United States Savings Bonds, Series I
2
TreasuryDirect. Fiscal Service Aids Savings Bonds Owners in Tennessee Affected by Severe Storms
3
eCFR. 31 CFR 359.7 – If I Redeem a Series I Savings Bond Before Five Years After the Issue Date, Is There an Interest Penalty
4
TreasuryDirect. I Bonds
5
TreasuryDirect. I Bonds Interest Rates
6
U.S. Treasury Fiscal Data. I Bonds Interest Rates
7
eCFR. 31 CFR 359.16 – When Does Interest Accrue on Series I Savings Bonds
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TreasuryDirect. Tax Information for EE and I Bonds
9
Office of the Law Revision Counsel. 26 USC 135 – Income from United States Savings Bonds Used to Pay Higher Education Tuition and Fees
10
TreasuryDirect. Questions and Answers About Series I Savings Bonds