I-Bond penalty

I recently checked my I-Bonds and saw they were earning zero percent interest. I also found a note “P5” which said there was a 3 month penalty being assessed. Why would I be assessed a penalty? They have not been touched since I bought them?

Last month I wrote a post about the zero percent composite rate currently being earned in I-Bonds and how that rate is calculated (http://www.boston.com/business/personalfinance/managingyourmoney/archives/2009/06/understanding_i.html). In that posting, I also mentioned how I-Bonds are subject to a penalty if redeemed within 5 years of when they are purchased. Specifically, I-Bonds issued in May 1997 or later will be penalized for 3 months worth of interest if they are redeemed within 5 years of their issuance date. This penalty is noted on the I-Bonds using the “P5” notation. You will see this notation when you look up the current value of your bond using the U.S. Treasury’s Savings Bond Calculator (http://www.treasurydirect.gov/indiv/tools/tools_savingsbondcalc.htm).

If you look up the value of your bond and you see a P5 notation on it, it means that your bond would be subject to the penalty if you redeemed it at that point in time. In other words, it means that your bond has not exceeded the 5-year holding period yet. Furthermore, the value or yield on your bond (at that point in time) already reflects the penalty. Keep in mind that you only get penalized if you redeem the bond. If you continue to hold it, the P5 notation will be removed once you exceed the 5-year holding period and the value of your bond will reflect an amount without the penalty.