Question 1

When does the I-Bond 3-month penalty go away?

Accepted Answer

After holding the I-Bond for 5 full years from the issue date, the 3-month interest penalty no longer applies. From year 5 onwards, you receive 100% of accrued interest on redemption.

Question 2

Can I redeem an I-Bond before 12 months?

Accepted Answer

No — I-Bonds have a 1-year lockup with no redemption allowed except in federally declared disaster areas. After 12 months, you can redeem any amount but forfeit the most recent 3 months of interest until the 5-year mark.

Question 3

How is the 3-month interest penalty calculated?

Accepted Answer

The penalty equals 3 months of interest at the most recent composite rate. For a $10,000 bond at a 3.11% composite rate: $10,000 × 3.11% / 12 × 3 = $77.75. The penalty reduces both your principal recovery and your effective yield.

Question 4

Is it ever worth redeeming early for a better rate?

Accepted Answer

Sometimes. If you hold a low-fixed-rate I-Bond (0.00-0.40%) and the current fixed rate is 1.20%+, swapping after 12 months can boost long-term yield even after the 3-month penalty. Use this calculator to model the break-even.

Question 5

What is the I-Bond purchase limit in 2026?

Accepted Answer

$10,000 per Social Security Number per year for electronic I-Bonds at TreasuryDirect, plus $5,000 in paper I-Bonds via tax refund (IRS Form 8888). Total $15,000/year per person. Spouses each have their own limit.

Question 6

Are I-Bond redemptions taxable?

Accepted Answer

Yes — accrued interest is taxable federal (deferrable until redemption or maturity 30 years out) but exempt from state and local tax. If used for qualified higher-education expenses, interest may be excluded entirely from federal tax under IRS Section 135.

Redemption Detail
Face Value	—
Accrued Interest (before penalty)	—
3-Month Interest Penalty	—
Net Redemption Amount	—
Yield Analysis
Gross Annualized Yield	—
Net Annualized Yield After Penalty	—

I-Bond Early Withdrawal Penalty Calculator

How the 3-Month Interest Penalty Works

Composite Rate Mechanics

When Penalty Redemption Still Makes Sense