Inheriting Savings Bonds (I Bonds and EE Bonds): Tax Rules and Options

I Bonds became enormously popular in 2021–2022 when inflation pushed their rate above 9%. Millions of Americans bought them — and many older Americans have held EE Bonds for decades. When a bondholder dies, their savings bonds pass to heirs with a tax treatment that surprises almost everyone: unlike inherited stocks or real estate, you get no step-up in basis. All those decades of deferred interest come due when you cash out. Here's how to handle it correctly.

The critical difference: no step-up in basis

When you inherit a stock portfolio, the cost basis resets to the market value on the date of death under IRC § 1014 — eliminating decades of embedded capital gains. Savings bonds don't work this way.¹

Savings bond interest is deferred ordinary income — the original owner never paid tax on it. The IRS classifies it as Income in Respect of a Decedent (IRD): income that was earned during the decedent's lifetime but never taxed. IRD does not receive a step-up. When you redeem the bond, you owe ordinary income tax on all accrued interest, at your marginal rate — potentially 22%, 24%, 32%, or 37%.

Who inherits? Three scenarios

Scenario 1: You are a named co-owner

If the bond is registered as "A or B" (two names with "or"), the surviving co-owner automatically becomes the sole owner at death — no estate process required.² The bond already belongs to you. You can choose to:

• Leave it as-is, continuing to earn interest
• Redeem it immediately
• Have it reissued in your name alone in TreasuryDirect

No probate. No court filings. The bond transitions quietly.

Scenario 2: You are the named POD (Payable on Death) beneficiary

A beneficiary designation on a savings bond (shown as "A POD B" on the bond certificate or in TreasuryDirect) bypasses the estate entirely — exactly like a named beneficiary on an IRA or life insurance policy.²

To claim the bond, you need a certified copy of the death certificate plus your own identification. For electronic bonds in TreasuryDirect, you'll open your own TreasuryDirect account and contact Treasury to initiate the transfer. For paper bonds, you can redeem them at most FDIC-member banks or mail them to Treasury with FS Form 1522.

Scenario 3: The bond passes through the estate

If the deceased was the sole owner with no beneficiary named, the bond becomes estate property. For estates that don't require probate (small estate laws vary by state), the estate representative can file FS Form 5336 with Treasury to distribute the bonds to heirs without full estate administration.³ For larger estates going through probate, the executor handles the transfer as part of the estate settlement — bonds must be distributed whole (they cannot be split) and reissued electronically.

Claiming your bonds: paper vs. electronic

Paper savings bonds

Series I and EE paper bonds can be redeemed at most banks that handle savings bonds (typically large FDIC-member banks). The bank will require your ID and a certified death certificate. Alternatively, you can mail paper bonds with FS Form 1522 directly to Treasury at the address on the form.

You can also convert inherited paper bonds to electronic form through your TreasuryDirect account using the SmartExchange feature — this preserves the bonds rather than forcing an immediate redemption decision.

Electronic bonds in TreasuryDirect

If the bonds are in a TreasuryDirect account, you cannot access the decedent's account directly. Instead, you open your own TreasuryDirect account and contact Treasury's customer service to initiate a transfer of the inherited bonds into your account. Treasury will require a death certificate and documentation of your right to inherit (POD designation or letters testamentary from the estate).

The executor election: the most important tax decision

Here's the tax planning lever that many families miss. The executor of the estate has a choice about how pre-death accrued interest is handled:⁴

If the executor elects to report the pre-death interest on the decedent's final return, you as the beneficiary only owe tax on interest that accrues after the date of death. This can produce significant savings if the bonds have been compounding for 20+ years and the estate's final-year tax rate is lower than yours.

This election must be made when filing the decedent's final Form 1040. It cannot be made retroactively after the return is filed. If you are both the executor and a beneficiary, or you are working with an estate attorney, raise this question explicitly before the final return is prepared.

I Bonds specifically: what you're inheriting

Series I Bonds earn a composite rate tied to inflation (CPI-U). The rate resets every six months. Key rules you need to know as an heir:

• Minimum hold before redemption. I Bonds can't be redeemed during the first year from their issue date. If you inherit a bond that was purchased less than 12 months ago, you must wait until it reaches the 12-month mark.
• Early redemption penalty. I Bonds cashed before 5 years from their issue date forfeit the last 3 months of interest. This penalty follows the bond, not the owner — even inherited bonds face it if the bond itself is less than 5 years old.
• Maturity. I Bonds earn interest for 30 years from issue. After that, they stop earning. If you inherit older I Bonds, check the issue date — bonds from the early 1990s may be nearing or past their maturity date and should be redeemed promptly.
• Current rate. The rate resets every May 1 and November 1 based on CPI data. Check TreasuryDirect for the current composite rate before deciding whether to hold or redeem.

EE Bonds specifically: the guaranteed doubler

Series EE Bonds have a fixed interest rate set at purchase, but with one crucial guarantee: a bond held for exactly 20 years from its issue date is guaranteed to double in value, regardless of the stated rate. Treasury makes a one-time adjustment at the 20-year mark if the stated rate alone wouldn't have produced the doubling.

This creates a binary decision structure for inherited EE Bonds:

• If the bond is less than 20 years old: holding to the 20-year mark may be optimal — you're guaranteeing a ~3.5% annualized return on the remaining period (equivalent to the doubling guarantee). Redeeming early throws away the guarantee.
• If the bond recently hit 20 years: the doubling guarantee has been realized. There's now little reason to keep holding unless the stated rate still compares favorably to alternatives. Redeem and redeploy.
• If the bond is between 20 and 30 years old: it continues earning interest at the stated rate. Compare that rate to what you'd earn elsewhere after tax.
• If the bond is past 30 years: it has stopped earning interest entirely. Redeem immediately — you're holding a zero-yield asset.

Timing your redemption: a few details matter

Savings bonds accrue interest on the first of each month and post on the first of the month following. If you redeem mid-month, you don't get the current month's partial interest. There's a simple optimization: redeem at the start of a month rather than mid-month, so you capture the previous month's posted interest.

For large inherited bond portfolios, spreading redemptions across tax years can reduce the bracket impact. If you redeem $50,000 in accrued interest this December versus January, you shift the tax liability by one year — potentially meaningful if your income varies. This is one of the planning levers a fee-only advisor will model in context of your full picture (other income, retirement contributions, IRA distributions, etc.).

The education exclusion (if it applies)

I Bonds and EE Bonds can be redeemed tax-free if the proceeds are used to pay qualified higher education expenses for you, your spouse, or a dependent — in the same tax year as redemption.⁵ This applies to tuition and fees at eligible institutions. Room and board, books, and similar costs don't qualify.

For 2026, the exclusion phases out for modified AGI above:

• Single filers: $101,800–$116,800
• Married filing jointly: $152,650–$182,650

If you inherited bonds and have a child heading to college in the next few years, this exclusion can eliminate the ordinary income tax entirely on the accrued interest portion — but only if your income is below the phaseout threshold in the year of redemption.

State inheritance taxes

Five states impose an inheritance tax on assets received from a decedent: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Savings bonds are tangible property of the estate and would be subject to state inheritance tax in those states based on the relationship to the decedent and the value of the bonds.⁶ See the Inheritance Tax by State 2026 guide for rates and exemptions.

Should you redeem inherited savings bonds or hold them?

Run through this framework:

1. Check the issue date and maturity. Bonds past 30 years: redeem immediately, they're earning nothing. EE Bonds approaching their 20-year guaranteed-doubling date: hold to capture the guarantee.
2. Check whether the 12-month minimum hold and 3-month penalty apply. If the I Bond is under 5 years old, factor in the penalty when computing your effective return from redeeming now.
3. Compare the current rate to alternatives. If an I Bond is earning 4.0% composite and a Treasury money market fund offers 4.3%, the spread after tax (bonds are state-tax-exempt; Treasury funds may not be) determines which is better.
4. Model your tax bracket this year vs. future years. If you're in your highest-earning years now and expect lower income in retirement, deferring redemption shifts the tax hit to a lower-bracket year.
5. Factor in the executor election. If the pre-death interest can be included in the decedent's final return at a lower rate, do that math before making any redemption decisions.

When to bring in a financial advisor

For a few small paper bonds with modest accrued interest, a tax preparer can handle this straightforwardly. Consider a fee-only inheritance specialist if:

• The bond portfolio is large (above $50,000–$100,000 in current value)
• You also inherited an IRA, brokerage account, or real estate simultaneously — the tax interactions across assets are where most planning value is captured
• You are deciding whether to ask the executor to make the pre-death interest election, and you need to model the bracket scenarios
• The bonds are old EE Bonds near their 20-year mark and the redemption timing has a meaningful dollar impact
• You have college-expense plans that could enable the education exclusion

The ordinary income tax on a $100,000 inherited bond portfolio in a 32% bracket is $32,000. Even if an advisor costs $3,000, finding bracket-arbitrage opportunities — spreading redemptions, timing against lower-income years, coordinating the executor election — routinely saves a multiple of that.

Related guides and tools

• What to Do When You Inherit Money: A Complete Guide — full first-year playbook across all asset types
• Inheriting a Brokerage Account: What to Do With Inherited Stocks — step-up basis for stocks, how it contrasts with savings bonds
• Step-Up Basis: What It Is and How to Use It — the §1014 rules for assets that do get a step-up
• Inheritance Tax by State 2026 — state-level tax rates for KY, MD, NE, NJ, and PA
• Inherited IRA 10-Year Rule — if you also inherited an IRA, the 10-year distribution strategy interacts with bond redemption tax planning