Savings Bonds: Are They the Best for Children’s Futures?

How savings bonds work

U.S. Savings Bonds come in a number of types and denominations from $25 to $10,000. Traditionally, bonds were purchased at half their face value and accumulated interest until a maturity date that would make them worth their face value or more. For example, a $50 bond could be purchased for $25 and would attain a redeemable value of $50 somewhere in the future. It was a nice gift for babies because by the time they graduated high school the bond would have matured and the young adult could cash it in for face value. Bonds as gifts show a very nice sentiment and are kind of a nifty gift onto which kids could hold. 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. Generally, the most common type of bond is the Series EE Bond, also known as the Patriot Bond after 2001. There was no real change to the bond’s value only a name change printed on the front denoting a more patriotic meaning. Prior to May of 2005, bonds accumulated interest at a variable rate based on the treasury yields over a 5 year period. 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 own bonds and want to know their value you can check on the 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. There are tax considerations, however. Any interest earned on the bond is taxable in the year that it is redeemed. Parents can redeem bonds for their children with a bit more writing and signing to verify that they are the parent with legal custody. All in all, it is a very easy process.

Are bonds the best gift for children?

It is true that bonds can be issued in the child’s name, have a very patriotic sheen, and are a very safe investment. 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%. The fixed rate bonds purchased after May 2005 fare no better. If you were to take that original $50-$100 and place it in a mutual fund the return on investment could triple in the short run and well out perform the bonds over the child’ s entire childhood. Granted, the mutual fund would be in an adult’s name, lose the patriotic feel, and does have risk involved. However, you have to ask what is best for the child: a nifty piece of paper or more money for college?

Other recent posts by bryanh