For decades we have been educated that not only is it our civic duty to buy Savings Bonds for the greater good of the country, but that they are an amazingly safe, secure, and easy way to diversify our portfolio and prepare for our financial future. Sure they are a risk free investment option, but there are penalties of cashing out savings bonds early.
One of the main penalties of cashing out savings bonds early is the forfeiting of interest. The three most recent months’ interest will be lost if bonds are redeemed within the first five years of purchase. After five years there are no penalties for withdrawal. Bonds must be held for a full year to be cashed out at all.
In general there are no tax penalties of cashing out savings bonds early. Savings bonds are a federally issued commodity and therefore the interest is already exempt from state and city taxes. However, the total profit from your savings bond will be added to your income for the year and could affect your tax bracket.
Although you may plan on holding a savings bond for the full 30 years of maturity, you may need to suck up the penalties of cashing out savings bonds early. In the case of emergency, such as a medical situation or loss of home – if you need money, you have to access whatever options you can. Weigh your financial options, calculate the monetary impact and compare to see if the benefits outweigh the lost interest.
Experts advise that savings bonds are great ways of building your long-term investment portfolio. The biggest penalty of cashing out savings bonds early are the ones you cause yourself. You will not be able to take advantage of a long-term savings strategy and the guaranteed return on investment that Savings Bonds offers if you cash in before the maturity date.