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Savings-Bonds-Alert: Interest Penalty for Cashing Bonds Before Five Years

Friday, August 06, 2004

Interest Penalty for Cashing Bonds Before Five Years

I am cashing Series EE Savings Bonds for my daughter's college fund. I want to do the ones with the worst interest. I looked them up in the Savings Bond Wizard and noticed the 2000, 2001, 2002 bonds have a three-month interest penalty. Are these the ones I should cash or should I drop down to years 1993, 1994, 1995? What does the penalty mean and does it affect my taxes? Do these bonds still carry the college education tax exemption? Tom's response The interest penalty just means that you lose the most recent three months worth of interest if you cash a bond before five years. It has no effect on your taxes or the education deduction. Your strategy of starting with the worst interest rates is sound. However, as you can see from this table of Series EE interest rates, bonds issued from March 1993 to April 1997 don't pay as much as those issued in May 97 and after. My advice would be to cash them in based on the rates shown in the table, starting with the lowest rates. If you work your way up into the bonds that are less than five years old, cash the newest ones first, with the goal of getting as many of them past the five-year date as you can, thus avoiding the three-month interest penalty. Click here to visit the premier independent web site on Federal Savings Bonds.


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