The first question is always “will I pay taxes if I cash them in?” Yes – you do pay federal taxes on the interest earned, but you don’t pay state taxes.
The second question is usually “should I cash them in or not?” Maybe – it depends. There are a lot of mature (no longer earning interest) savings bonds out there – about $16.7 billion according to the US Treasury. Series H bonds, many Series E bonds and some Series EE and some Series HH bonds no longer earn interest. After June 2010 all Series E bonds will stop earning interest. Holding onto those mature bonds is like keeping money under your mattress – they’re not earning you any money - so the general recommendation by experts is to cash them in.
Redeeming mature bonds should be done carefully. If you have a large number of bonds and redeem that all at once, you may find yourself in a higher tax bracket. Please consult with me before you do anything so we can figure out what the best timing for redemption will be for you.
If you need to cash in bonds that are still earning interest, it’s important that you know when the interest is calculated. Some older bonds have interest calculated only every six months; new bonds are calculated monthly. There’s no sense losing money by cashing them in right before interest is calculated.
There’s an additional concern when you’re cashing in bonds that are still earning interest – if you’ve had the bonds less than five years there may be a penalty of three months’ interest imposed.
Once you’ve determined that you do want to redeem your bonds, there are several ways to proceed. First, make sure you know what the bonds are worth by using the calculator on TreasuryDirect.gov. Then take the bonds to your bank or credit union for redemption. You can also send them directly to the Treasury Department for redemption, but that requires you to have your signature verified by a bank or credit union before mailing them in.