Buying savings bonds for a child can be a great way to save for their future and teach them about the benefits of investing. Investing in a child’s future is a priority for many parents.
Savings bonds offer a unique opportunity, they’re secure and low-risk investment option that adjust for inflation after every six months. The good thing is that you can purchase for yourself, buy an I bond for your child, or giving them as a gift.
We’ll discuss what savings bonds are, and review different types of savings bonds. We’ll also walk you through the process of purchasing savings bonds, how to manage and redeem them, and what you need to know about their benefits and limitations.
Whether you’re a parent, grandparent, or guardian looking to give your child a head start in financial planning, this article provides you with all the information you need to get started on the path to financial security for your little one.
What Are Savings Bonds?
Government issued-debt securities that accrue interest over time. When purchasing a savings bond, you effectively lend funds to the federal government. In return, the government commits to repaying the amount, along with accrued interest, within a predetermined timeframe. Savings bonds are being considered safe investments because they are backed by the government’s credit.
Also Read:
- Important things to know before investing in stocks
- Investing in stocks for beginners with little money
- How to calculate expense ratio
- Mutual Funds: Advantages and disadvantages
Types of Savings Bonds
Series I bonds
They are available electronically or purchasable with an IRS tax refund for a paper version, differ from Series EE bonds. They combine a fixed interest rate with a variable rate tied to inflation.
The inflation rate, which relates to Consumer Index Price changes every six months. The same as I bonds fixed rate which is announced between May 1 and November 1. Currently, I bonds fixed interest rate is at 1.30%.
According to October 2023 FDIC data, the I bond rates for on or after November 1, 2023 is 5.27% which surplus average savings account by 0.46%.
Series EE Savings bond
You can access them ONLY in electronic format, yield a fixed monthly interest rate, guaranteeing a minimum doubling of their value after 20 years. Electronic EE bonds interest rates are automatically paid when they mature while Paper EE bonds you’ve to submit the paper bonds to cash in.
To buy and manage the new EE bonds, you must have a TreasuryDirect account. It is important to note that you can cash in EE bonds only after 12 months, if it’s less than 5 years you’ll lose the last three month interest.
The current interest rate for EE bonds as of November 1, 2023 to April 30, 2024 is 2.70%. The interest rate is compounded every six months.
Where to Buy Savings Bonds in Person?
They are issued by the U.S Treasury and insured by the federal government. The accessibility and security of savings bonds make them a viable option for those seeking stability in their financial portfolio. Investors can purchase them for as little as $25 or invest up to $10,000.
Buying Savings Bonds for a child
Buying savings bonds for a baby is a great way to introduce them to saving money and investing. You can purchase them directly from the U.S. Treasury Department website or allowed financial institutions.
However, both you and the child must have a TreasuryDirect account before you purchase bonds. The childs’ account also needs to link to their parent or other custodial account. Other individuals can also buy bonds as a gift and deposit into the child’s linked account.
When buying savings bond for a child, the purchaser will need:
- Child’s full name
- Social Security Number and birth date
- The child’s TreasuryDirect account number
Note that treasury bonds bought as gifts stay in the purchaser’s account for five business days before they get transferred to the recipient’s account. Or, print out a gift certificate detailing the savings bonds gift.
Process of Purchasing Savings Bonds
The process of purchasing savings bonds is within one business day from the purchase date. The process of purchasing between Series EE and Series I bond savings vary. It is important to understand the differences between Series EE and Series I bonds. Below, we’ve outlined the process for each to help decide which one aligns with your goals.
(1) Purchasing Electronic EE or I Saving Bonds
Here are easy to follow steps while buying series ee savings bonds:
- Navigate to your TreasuryDirect account.
- Select BuyDirect.
- Choose whether you want EE bonds or I bonds, and then click Submit.
- Fill out your information.
The minimum amount to buy an electronic savings bond is $25 to a maximum of $10,000. Besides that, for Series EE and Series I electronic savings bonds, you can buy $10,000 in one calender a year for an individual.
Note that if using saving bonds for higher education, they recommend it to keep electronic bonds under your own name instead of your child’s name.
(2) Purchasing Paper Series I Saving Bonds
If buying paper savings bonds, you’ll only use your IRS tax refund to buy Up To $5,000 in $50 increments. The bonds vary in denominations including $1,000, $500, $200, $100, and in $50. Fill out IRS Form 8888 to show how much to go to a paper savings bond.
In addition, on form 8888, you show who to own paper savings bond. Also, you may give paper savings bond as a gift. Note, the maximum you can buy paper savings bond in one calendar year is $5,000.
How to Cash in/Redeem Savings Bonds
According to the U.S. Department of the Treasury, as of April 2021, approximately 80 million savings bonds, totaling $29 billion had matured but remained unredeemed.
If giving savings bonds as gifts, it is wise to wait until the bonds have reached their full maturity before redeeming them.
Here’s a step-by-step guide:
- Determine the value of the bond: Use the savings bond calculator for paper bonds or log in to your TreasuryDirect account to see the value of electronic savings bonds.
- Prepare proof of identification: Ensure you’ve valid identification.
- Visit a financial institution: Visit a financial institution that redeems savings bonds to cash in your paper bond. For electronic savings bonds, redeem through your own TreasuryDirect account.
- Wait for the funds to be deposited: Once you redeem the bond, the cash value will be deposited into your checking or savings account within a few business days.
Redeeming Savings Bonds for a Baby
- Write your name and your child’s names on the back of a paper bond.
- Provide a written statement confirming your legal guardianship.
Alternatively, complete and submit a form to the Treasury, which may require a certified signature. For electronic savings bonds, create a TreasuryDirect account for your child and link it to your account to redeem bonds.
Benefits and Downside of Savings Bonds for a Kid
While Savings bonds for a kid have many benefits, there are also a few drawbacks.
| Pros | Cons |
| Safe investment | Low return |
| Guaranteed return | Long-term investment |
| Low risk | Inflation risk |
| Tax benefits | Must have a separate account |
| Limited investment amount |
Pros:
- Safe investment: The government backs Savings bonds, making them a safe investment option for a baby’s future.
- Guaranteed return: They have a guaranteed rate of return. This means you can calculate precisely how much your investment will be worth when it matures.
- Low risk: They have a low risk of loss or default than other investment options.
- Tax benefits: The interest earned is exempt from state and local taxes. It can also be tax-free at the federal level if used for qualified educational expenses.
Cons:
- Low return: While they are low-risk, they also offer a lower return rate than other investment options.
- Long-term investment: They have a long maturity period. This may not be the best option for parents needing more immediate funds access.
- Limited investment amount: There is a limit to how much you can invest in a given year. It may need to be increased for parents looking to maximize their investment potential.
- Inflation risk: Savings bonds may not keep up with inflation, which means the purchasing power of your investment may decrease over time.
- Have a separate account: To purchase savings bonds, you must create a separate account through TreasuryDirect. They cannot be bought through a regular brokerage account or a custodial account for a child.
Bottom Line
Buying savings bonds for a baby can be a great investment for their future. You can buy paper bonds through financial institutions or electronic bonds through the TreasuryDirect website.
It is important to consider the benefits and drawbacks, such as the interest rates and potential tax implications. In addition, there are limits on how much you can invest per year, so it’s important to plan accordingly.
FREQUENTLY ASKED QUESTIONS
How many savings bonds can I buy in a year?
Individuals or entities may purchase up to $10,000 worth of electronic EE and I Savings Bonds per calendar year. It’s worth noting that purchasing other types of Treasury securities will not affect this limit.
How much bond can I buy for my grandkids?
The yearly limit for electronic EE bonds and electronic I bond for each child is $10,000, while the limit for the paper I bond is $5,000. These limits apply to all children.
Do savings bonds grow money?
Series EE savings bonds are a safe way to save money. They earn interest for 30 years or until you cash them out. If you buy EE bonds now, they will double in value after 20 years. It is guaranteed even if extra money is needed to make this happen.
Do savings bonds expire?
Savings bonds do not expire, they only stop earning interest when they reach full maturity.
Where can I purchase savings bonds?
TreasuryDirect.gov. The official U.S. website and only place to electronically buy and redeem Savings Bonds. They also offer electronic sales and auctions of other U.S.-backed investments to the general public, financial professionals, and state and local governments.
How do you cash out savings bonds?
The only method to redeem electronic savings bonds is by accessing your TreasuryDirect account online. For paper savings bonds, complete the relevant form and mail both the form and the bonds for redemption to the Treasury Retail Securities Services, with the address provided on FS Form 1522.