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When Can I Cash Out I Bonds? Redemption Rules and Penalties

A detailed guide to I Bond redemption rules, including the 12-month lockup, 3-month interest penalty, five-year rule, taxes, and timing strategies.

4 min read

You can usually cash out an I Bond after you have held it for at least 12 months. But if you redeem before the bond is five years old, you lose the last three months of interest. After five years, there is no early-redemption interest penalty.

Those two rules matter more than the headline rate. I Bonds can be excellent inflation-linked savings, but they are not same-day emergency cash during the first year.

If you are evaluating the current rate, read I Bonds May 2026 Rate: How the 4.26% Composite Rate Works. If you are comparing safer cash choices, see Treasury Bills vs CDs vs High-Yield Savings in 2026.

I Bond Redemption Timeline

Holding period Can you redeem? Penalty
Less than 12 months No, with limited disaster exceptions Not redeemable
12 months to less than 5 years Yes Lose last 3 months of interest
5 years to 30 years Yes No penalty
After 30 years Bond stops earning interest No penalty, but no more interest accrues

The three-month penalty is based on the most recent three months of interest, not three months of principal.

How the Three-Month Penalty Works

Suppose you buy an I Bond and redeem it after 18 months. You receive the value of the bond minus the last three months of interest. In effect, you keep the first 15 months of interest.

This creates a simple timing strategy: if the bond’s current rate has dropped sharply, some investors wait until the low-rate months are the months being forfeited. That can reduce the practical cost of redeeming before five years.

Example:

  • Months 1-6: high rate
  • Months 7-12: high rate
  • Months 13-15: low rate
  • Redeem after month 15

In that pattern, the forfeited interest may be the lower-rate period. This is not always possible, but it is worth checking before redeeming a large bond.

How to Cash Out Electronic I Bonds

Most newer I Bonds are electronic and held at TreasuryDirect. To redeem:

  1. Log in to TreasuryDirect.
  2. Go to the savings bond redemption area.
  3. Select the bond.
  4. Choose full or partial redemption if allowed.
  5. Confirm the bank account for deposit.

TreasuryDirect typically sends redeemed funds to the linked bank account. Processing times can vary, so do not wait until the exact day a bill is due.

Partial Redemption

Electronic I Bonds can generally be redeemed partially, subject to minimums and TreasuryDirect rules. This can be useful if you bought a large bond but only need part of the money.

Paper I Bonds are different and may require redemption through a financial institution or by mail, depending on current procedures.

Taxes When You Redeem

I Bond interest is federally taxable and generally exempt from state and local income tax. Many investors defer federal income tax until redemption. When you cash out, taxable interest may be reported for that year.

That can create a tax surprise if you redeem several years of accumulated interest at once. If you are near a tax-credit phaseout, student aid calculation, Medicare premium threshold, or other income-sensitive limit, consider the timing before redeeming a large amount.

Should You Cash Out Older I Bonds?

Consider redeeming if:

  • the bond has a low fixed rate
  • the current composite rate is unattractive
  • you are past the one-year lockup
  • the three-month penalty is small
  • you have a better use for the money
  • you need cash

Consider holding if:

  • the bond has a high fixed rate
  • you value inflation protection
  • you are close to the five-year no-penalty date
  • redeeming would create unwanted taxable income
  • you have not used the bond as part of long-term safe savings

For newer bonds with a 0.90% fixed rate, see I Bond Fixed Rate 0.90%: Why It Matters.

Bottom Line

You generally cannot cash out an I Bond during the first 12 months. From year one through year five, redemption is allowed but costs the last three months of interest. After five years, you can redeem without penalty. The best redemption month depends on your bond’s rate history, tax situation, and need for cash.

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