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Considering Savings Bonds for Our Children’s Futures

How savings bonds work

U.S. Savings Bonds have several types, and values of $ 25 up to $ 10,000. Bonds heretofore were bought at half the face value, and accrued interest until a maturity date, when they’d be worth face value or better. For example, a $ 50 bond could be purchased for $ 25 and would attain a redeemable value of $ 50 somewhere in the future. It used to be a nice gift for infants, because the bond could be cashed for face value after the child had graduated high school, when the bond had matured. Bonds, given as gifts, are a nice sentiment an are nifty gifts kids can hold onto. In fact, bonds are one of the only securities which can be held in a minor’s name.

How savings bonds gain value

The way in which and the rate at which bonds gain value has changed in recent years. Typically, the most common bond series is the Series EE Bond, also called the Patriot Bond since 2001. There was no real change to the bond’s value only a name change printed on the front denoting a more patriotic meaning. Before May 2005, bonds accrued interest at variable rates based on treasury yields over a 5 year time span. So, bonds could accumulate value faster or slower depending on when they were purchased and how the economy did over time. After May 1, 2005, bonds are assigned a fixed rate at the time of purchase. If you have bonds, and want to see what they’re worth, you can look them up at TreasuryDirect.gov website which has a calculator program. All you do is type in the type of bond, face value, and the month/year purchase date and the calculator will show you the current value of that bond.

How to redeem bonds

Bonds are easy to redeem at almost any financial institution. Just have proper ID and you simply sign them and cash them in. That all said, there are tax issues to contemplate. Interest earned on the bond is taxable in the year it’s redeemed. Parents can cash in bonds for their children with a little more paperwork, as they do have to verify they are the parents and have legal custody. It’s beyond easy.

Are bonds the best gift for the children?

It’s true that bonds can be issued in a child’s name, they have a patriotic look, and are safe investments. However, if you look at the interest that bonds are earning there might be better things to do with your contribution to the child’s future. Typically, bonds purchased after 2001 with variable interest rates earn an average annual yield of between 1.6% and 2.5%. Fixed rate bonds bought after May 2005 aren’t much better. If you took that $ 50 to $ 100 and put it in a mutual fund, the return could triple in the short run, and out perform the bond when the child is growing up. Granted, a mutual fund has to be in an adult’s name, isn’t as patriotic, and carries risks. However, you have to ask what is best for the child: a nifty piece of paper or more money for college?

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