Savings Bonds as Gifts

Gift-giving is an art that combines thoughtfulness with practicality.

When it comes to financial gifts, savings bonds stand out as a timeless choice.

Savings bonds offer a blend of safety, sentimental value, and potential for growth.

In this article we explore the unique appeal of savings bonds as gifts.

Up Ahead:

How to Give Savings Bonds as Gifts

Gifting a savings bond, whether electronically or as a paper certificate, involves a few simple steps.

For electronic bonds, the process begins on the TreasuryDirect website:

1. Setting Up Accounts: Both the giver and the recipient need individual TreasuryDirect accounts.
   This is essential for transferring the bond electronically.
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2. Purchasing the Bond: Log into your TreasuryDirect account, select the type of bond (Series EE or I), and complete the purchase.
   During this process, you'll specify that the bond is a gift and enter the recipient's details, including social security numbers.
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3. Transferring the Bond: After a holding period of five business days, you can deliver the bond to the recipient's account via the 'Gift Box' feature in your TreasuryDirect account.

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Gifting savings bonds in paper form has its own charm and nostalgia, even though the process has changed over the years.

Gifting a savings bond, whether electronically or as a paper certificate, involves a few simple steps.

Understanding these changes and requirements is key to successfully gifting a paper savings bond.

The IRS ceased the over-the-counter sale of paper savings bonds.

The focus has shifted to acquiring them through a different, more specific channel - your tax return.

For paper savings bonds:

1. Wait for Your Tax Return Filing: You can only purchase paper Series I savings bonds with your tax return.
   If you don't have a tax refund due, you cannot buy a paper savings bond.
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2. Tax Form 8888: Use IRS Form 8888 to allocate a part of your tax refund for this purpose.
   Fill out the gift recipient's identification info, like social security numbers. Paper savings bonds are personal and cannot be transferred to others.
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3. ‍Gifting the Bond: Once you receive the bond, you can present it as a gift.
   Remember, paper bonds offer a tangible element that might be appreciated by the recipient.

You can only purchase paper Series I savings bonds with your tax return.

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Are Savings Bonds Still Good Gifts?

In an age of high-tech investments and digital currencies, savings bonds hold their ground.

They still generate interest from grandparents, aunts and uncles who want to give savings bonds for kids.

Savings bonds are reliable, low-risk financial gifts.

Their appeal comes from two benefits.

First - their safety.

Savings bonds are backed by the U.S. government.

In an age of high-tech investments and digital currencies, savings bonds hold their ground.

Second - they provide a guaranteed return, especially in the case of Series EE bonds which double in value over 20 years.

Lastly, savings bonds, along with other financial gifts, have the potential to kickstart great financial habits.

Albert Einstein has a famous quote - "Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it".

Owning a savings bond can lead to learning financial literacy, on top of the obvious monetary benefits.

There are cons to giving savings bonds as gifts.

Compared to more aggressive investment options, savings bonds typically offer lower returns.

Investments for kids made through UTMA accounts for example can provide averages of 8% per year, or even higher.

Compared to more aggressive investment options, savings bonds typically offer lower returns.

The process of gifting savings bonds, especially electronically, can be less straightforward than other financial gifts.

Greatest Gift offers a great financial gifting experience.

The Value of a $100 Savings Bond Gift in 30 Years

A $100 savings bond can be a modest yet meaningful gift with significant growth potential.

A savings bond's potential growth over 30 years is an important aspect to understand.

Let's start with an example of a $100 Series EE savings bond as a gift.

The bond's value evolution can be divided into two distinct phases.

Guaranteed Doubling in 20 Years

The unique feature of Series EE bonds is the guarantee of doubling in value after 20 years.

This means your $100 investment is assured to grow to $200 by this time. Unless the interest rates during this period is higher than 3.5%, that's the best you will get for it.

The unique feature of Series EE bonds is the guarantee of doubling in value after 20 years.

This guaranteed growth is a significant advantage, especially in a low-interest-rate environment.

Projected Growth in the Next 10 Years

For the remaining 10 years, the bond continues to earn interest.

For this example, let's assume an average yearly rate of 2%.

The total potential value of the bond after 30 years would be approximately $243.80.

Next, we apply this rate to the doubled amount ($200) for the next 10 years.

The total potential value of the bond after 30 years would be approximately $243.80

This calculation assumes a consistent interest rate and annual compounding, providing a general estimate of what the bond could be worth.

The actual future value might vary depending on the interest rate changes over the next 30 years.

The Effective Rate

Understanding the effective Annual Percentage Yield (APY) of this investment helps us compare this with other investments or financial gifts.

For the $100 Series EE savings bond growing to approximately $243.80 over 30 years, the effective APY is around 3.02%.

An APY of 3.02% is quite somewhat competitive, especially when considering the low-risk nature of savings bonds.

When gifting a savings bond, you're not just offering a monetary value.

You're also gifting a potential return that grows over time, making it a thoughtful financial gift.

The Value of a Series I Savings Bond Over 30 Years

Series I savings bond offer a unique blend of variable and fixed interest rates.

The variable rate has experiences highs and lows, with rates like 4.81% in May 2022 and lower rates like 0.53% in May 2020.

This fluctuation ensures the bond's value keeps pace with changing economic conditions.

In addition to the variable rate, Series I bonds also have a fixed rate, set at the time of issuance.

The fixed rate remains constant for the life of the bond.

The $100 gift would grow to approximately $282.31 over 30 years.

For instance, bonds issued in November 2023 have a fixed rate of 1.30%, whereas those issued in May 2020 had a fixed rate of 0.00%.

The total interest earned on a Series I bond is a combination of this fixed rate and the semi-annual inflation rate.

Let's examine an example of gifting a $100 Series I savings bond.

For a bond issued with a fixed rate of 1.00% and experiencing average inflation rates around 2.52%, the combined effect adds up to 3.52% APY.

The $100 gift would grow to approximately $282.31 over 30 years.

This happens thanks to the magic of compound interest.

By understanding these aspects, Series I bonds stand out as a thoughtful and strategic choice for gifting.

Limits and Taxes

When gifting savings bonds, it's important to be aware of the purchase limits and tax implications.

As of now, you can purchase up to $10,000 in electronic bonds and $5,000 in paper bonds per year, per series type, per recipient.

The interest earned on savings bonds is subject to federal tax but exempt from state and local taxes.

Notably, if used for educational purposes, the interest might be tax-exempt, making savings bonds an attractive option for educational gifts.

Summary

That's a wrap on savings bonds as gifts!

Give a $100 bond today, and in 30 years, it will be worth more than double.

That's not just a gift; it's a little seed that grows over time.

Think of it like planting a tree. It starts small, but with time, it becomes something much bigger.

It can even be the starting point of building your family's generational wealth.

Sure, buying these bonds has a few twists and turns, especially the paper ones.

But, it's all about giving something that lasts, something that shows you care about the future.

So next time you're stuck on gift ideas, why not think about a savings bond?

It's more than just money. It's a gift that keeps on growing.