Savings Bonds, and the Year You Choose to Cash Them
Series EE and I savings bonds have a feature that almost nothing else in a taxable account does: the interest is not taxed until you cash the bond. That turns a pile of old bonds in a drawer into something you can time, and for a household with an uneven income the timing is worth real money.
- Federal deferral:: No tax until you cash the bond or it stops earning at final maturity, whichever comes first.
- No state tax:: Savings bond interest is exempt from state and local income tax in every state.
- The five-year rule:: Cashing before five years forfeits the last three months of interest. Before twelve months you cannot cash at all.
- The education exclusion:: Interest may be tax-free if used for qualifying education expenses and your income is under the limit, claimed on Form 8815.
Where the AI summary above gets this wrong
"Cash your savings bonds when they mature and report the interest."
That's surface-true. Here's what it misses:
- The year is yours to pick, until it is not — Deferral is not indefinite. A bond stops earning interest at final maturity, and the accrued interest becomes taxable in that year whether or not you cash it. Bonds forgotten in a drawer past that point produce a tax bill in a year nobody chose, sometimes with penalties for not reporting it.
- The gap between working and Social Security is the window — For someone who retires before claiming Social Security and before required distributions begin, taxable income can fall for several years. Cashing bonds into that gap moves the interest from a working-year bracket to a low one, and the difference on a decade of accrued interest is substantial.
- The education exclusion has conditions people fail after the fact — The bond must have been issued after 1989, the owner must have been at least 24 at issue, and the expenses must be paid in the same year the bond is cashed. A bond bought in a child's name generally does not qualify, and that is discovered at the point of claiming rather than the point of buying.
01 How the tax treatment works
Interest on Series EE and I savings bonds accrues inside the bond and is not reported annually unless you elect to. The default is deferral: nothing is taxed until the bond is cashed, or until it reaches final maturity and stops earning, whichever happens first.
The interest is exempt from state and local income tax everywhere. That is the same treatment marketable Treasury securities receive, and it is worth most to residents of high-tax states.
Two timing rules constrain the choice. A bond cannot be cashed at all in its first twelve months. Cashed before five years, it forfeits the most recent three months of interest. After five years there is no penalty and the only question left is which tax year to put the interest in.
Source: Series I savings bonds
02 Choosing the year
Because the whole accrued amount lands in a single year, the bracket that year matters more than anything else about the bond. A household cashing decades of accrued interest in a full working year can pay double what the same bonds would cost in a low-income one.
The natural window is the stretch after work stops and before Social Security and required distributions begin, when taxable income is often at its lifetime low. The same window is where Roth conversions compete for space, so the two have to be planned against each other rather than separately.
Bonds can be cashed in parts across several years, which is the practical way to keep a large accrued balance from pushing a single year into a higher bracket. Final maturity is the deadline that ends the flexibility, so knowing the issue dates matters.
Shows: the federal tax difference between cashing savings bonds in a high-income year and a low-income one, on interest that has been deferred since purchase. Ignores: state tax, which savings bond interest is exempt from anyway, the education exclusion, and the effect of the interest on other income-tested thresholds.
Source: Cashing a savings bond
03 The education exclusion
Interest from qualifying savings bonds cashed to pay higher education expenses may be excluded from income entirely, claimed on Form 8815. The conditions are specific and are best checked before buying rather than before cashing.
The bond must have been issued after 1989 to an owner who was at least 24 years old at the time of issue. Bonds registered in a child's name generally fail this. The qualifying expenses must be paid in the same year the bond is cashed, and the exclusion phases out above an income limit.
Where a household is also using a 529, the two interact — expenses covered by one cannot be counted again for the other. A savings bond cashed into a 529 can qualify, which is the route worth knowing when the timing of the fees and the timing of the bond do not line up, and it sits alongside the wider cost of children arithmetic.
Source: About Form 8815
The savings bonds I get asked about are almost always in an envelope somebody's parents left, and the question is whether to cash them. The answer starts with the issue dates, because a bond past final maturity has already produced taxable interest and is sitting there earning nothing. Find the dates first. Then, if there is still deferral running, treat the bonds as a lever you can pull in whichever year your income is lowest — that is the only real advantage they have left, and it is worth using deliberately.
FAQ
When do I have to pay tax on savings bond interest?
In the year you cash the bond, or in the year it reaches final maturity and stops earning interest, whichever comes first. Deferral ends at final maturity whether or not you cash it.
Is savings bond interest taxed by my state?
No. Interest on Series EE and I savings bonds is exempt from state and local income tax in every state. Federal tax still applies unless the education exclusion does.
Can savings bonds pay for college tax-free?
Sometimes. The bond must have been issued after 1989 to an owner aged at least 24 at issue, the expenses must be paid in the same year, and your income must be under the limit. It is claimed on Form 8815.
Sources
Regulator references
- Series I savings bonds · TreasuryDirect, U.S. Department of the Treasury · 2026How the rate is built, the annual purchase limit, and the holding rules.Last verified: 2026-09-07
- Cashing a savings bond · TreasuryDirect, U.S. Department of the Treasury · 2026The one-year lock, the five-year interest forfeit, and when interest becomes taxable.Last verified: 2026-09-07
- About Form 8815 · Internal Revenue Service · 2026The education exclusion that can make savings bond interest tax-free.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.