Savings bonds for kidsSavings bonds for kids

Savings Bonds for Kids: The Complete Guide

Updated:
October 31, 2022
Financial Gifting

TL;DR: Savings bonds can provide a safe, long-term investment with a solid potential upside for kids in your life, but the process to buy them and give them as gifts makes them an uncomfortable investment choice.

History, paper bonds, popular, alternatives, gifts, taxes,

Savings Bonds were the financial gift of choice by many financially savvy aunts, uncles and grandparents that wanted to give the gift of a brighter future.

You may even have a long-forgotten paper version that you received once upon a time in your parent’s attic.

But a few things changed since those days.

Today, you can buy savings bonds either online or once a year through your tax return.

In 2011 the IRS stopped selling the paper version of Savings Bonds and moved exclusively to selling the electronic version on the TreasuryDirect Website (unfortunately, it doesn’t look like they updated the website since then).

The move made giving a Savings Bond as a gift a difficult process and removed many of the presentation and personalization elements that were possible with a paper bond, like adding greetings and gift wrap.

Today, you can buy savings bonds either online or once a year through your tax return.

Read on to learn how to buy savings bonds for a child, how to cash them in, and alternatives if you decide savings bonds are not for you.

Up Ahead:

How Savings Bonds Work

When you purchase a US Treasury Savings Bond, you essentially lend money to the US federal government and earn interest in return.

Savings bonds are insured by the US government, making them a safe investment.

You essentially lend money to the US federal government and earn interest in return

For many years, paper version of savings bonds were sold by financial institutions like banks over the counter, but in 2012 the treasury department ceased this method of sales.

how savings bonds work

Today, savings bonds are sold primarily in electronic form through the TreasuryDirect website.

The only remaining way to purchase paper savings bonds is with the yearly tax return, and that is only if you are owed a tax refund.

If you are owed a tax refund, you can use tax form 8888 to request to receive part of your refund in Series I paper savings bonds.

Eliminating paper bond sales made purchasing savings bonds as gifts difficult and pushed many people to find other ways to give financial gifts.

Series EE bonds are guaranteed to double in value at 20 years through a one-time adjustment, just like their name suggests (double E)

Bonds are sold at face value and earn interest on top of their original face value. They can earn interest for up to 30 years or until you cash them in.

For example, a $50 series EE bond will cost $50 when you buy it and will start earning interest on top of that. When you decide to cash is in, you will receive the $50 you invested and any interest in addition that your bond earned over time.

The minimum purchase is $25. The max you can purchase per person is $10,000 in a calendar year.

Bonds need to be held for at least 1 year before they can be cashed in. They also have a small penalty equal to the interest earned in the last three months if you cash them in within the first 5 years.

Bonds need to be held for at least 1 year before they can be cashed in

Interest earnings are subject to federal income tax and are not subject to any State taxation.

However, earnings may be exempt from federal income tax when the bonds are used to pay for qualified higher education costs.

There are two types of US savings bonds:

1) Series EE Bonds

  • Available online only
  • Have a fixed interest rate for their entire duration (with the exception of a one-time value adjustment)
  • Interest is compounded semiannually, meaning twice a year the interest that the bond earned in the previous six months is added to the value of the bond. Interest in the next six-month period is earned on this new value.
  • Series EE bonds are guaranteed to double in value at 20 years through a one-time adjustment, just like their name suggests (double E).
  • Interest rates for series EE bonds have been under 0.7% for the past ten years.

2) Series I Bonds

  • Available for purchase online and in paper form
  • Earns both a fixed interest rate and a variable interest rate based on the inflation rate (hence, “Series I”), together a composite rate. The fixed rate never changes. The inflation rate can and usually does change every six months.
  • Interest is compounded semiannually, meaning twice a year the interest that the bond earned in the previous six months is added to the value of the bond. Interest in the next six-month period is earned on this new value.
  • Fixed rates have been under 0.6% for the past ten years.
  • The latest inflation rate is 9.62% per year or 4.31% for six months.

Benefits of Purchasing Saving Bonds

There are a few benefits to purchasing savings bonds.

If there is one benefit of purchasing savings bonds, it’s the low-risk nature of it as an investment.

Since savings bonds are guaranteed by the US federal government, there is very low risk that they will fall in value. In fact, they may even be better than cash that loses value due to inflation every day. Series I bonds track inflation and are supposed to protect owners from inflation, and series EE’s one time doubling adjustment essentially guarantees an effective interest rate 3.5% per year.

If there is one benefit of purchasing savings bonds, it’s the low-risk nature of it as an investment

Another benefit of savings bonds is that it encourages saving for the long term. This is especially beneficial when looking to invest for kids.

Bonds have a minimum of 12 months before they can be redeemed, have a penalty for cashing in before 5 years, and Series EE specifically have a bonus one-time doubling adjustment if you keep them for 20 years.

Disadvantages of Buying Saving Bonds

On average, savings bonds have a lower rate of return than other more aggressive investments.

Waiting periods, penalties and bonuses may be encouraging for people to save for the long term on one hand, but they can also be limiting people’s options on the other hand.

Finally, savings bonds are exclusively managed on the outdated Treasury Direct website. You may want to avoid the glitchy website and opt for a different investment, especially if you want to gift money to kids.

How to Buy Savings Bonds for a Child

When you purchase a savings bond, you register the bond. The registration determines who owns the bond and who can cash it.

How to Buy a Bond for Your Child

To purchase an electronic savings bond for your child, first open a TreasuryDirect account for yourself. Make sure you have your social security number and bank account information ready.

Next, set up a Minor Linked Account. To do this, log in to your account and go to the ManageDirect tab at the top of the page.

From there, click on “Establish a Minor Linked Account” and complete the minor account registration process.You’ll need the child’s social security number to complete this.

Note – in order to open a minor account you must be a parent, natural guardian or the person providing chief financial support to the minor.

Now that you have an account and a linked account for your child, you can purchase savings bonds.

Log in to your TreasuryDirect account and then to the child’s minor linked account. Purchase the savings bonds you want through the linked account.

Choose the Savings Bond series you prefer, the purchase amount and the funding source.

When the minor turns 18, you can either de-link the account and hand it over to your child, or keep the account linked for a later time and continue purchasing bonds for your kid.

If you are owed a federal tax return, you can buy a paper Series I bond for your child in multiples of $50.

Use tax form 8888 to request that a portion of your return be paid in paper bonds. For the owner of the bond, enter your child’s full legal name.

Purchasing Savings Bonds for Grandchildren

The easiest way to purchase savings bonds to your grandson or granddaughter is by buying a Series I Paper Bond during tax season.

Use tax form 8888 to request that a portion of your return be paid in paper bonds. Enter the grandchild’s full legal name as the owner of the bond.

When you get the bonds delivered in the mail, add a nice bow and give as a gift to the parents (or keep it yourself for safekeeping until the child is older).

The easiest way to purchase savings bonds to your grandson or granddaughter is by buying a Series I Paper Bond during tax season

Unfortunately, it’s not easy to buy an electronic savings bond for a grandchild.

You can only open a minor account if you are a parent, natural guardian or the person providing chief financial support to the minor.

Otherwise, you can purchase the savings bond as a gift electronically (you’ll need the child’s full legal name and social security number) or choose a different financial gift.

Greatest Gift’s financial gifting platform turns investing in a child’s future into a gift that you can send to grandkids and continues to show parents how to save and invest for the future.

All you need is the parent’s phone number or email.

How to Purchase Savings Bonds as a Gift for a Child

You can buy savings bonds as gifts in two ways, the first as a paper bond and the second in digital form through the TreasuryDirect website.

To buy a paper savings bond as a gift, you’ll need to wait for your tax return.

To buy a paper savings bond as a gift, you’ll need to wait for your tax return

However, if tax season is too far away, or if you don’t think you’ll be owed a federal return, you may be out of luck. Consider buying a digital version instead or look at Greatest Gift’s gifting platform for a modern way to gift money to kids.

If you are owed a federal tax return, use tax form 8888 to request that a portion of your return be paid in paper bonds.

Enter the child’s full legal name as the owner of the bond. If you’re not sure what the legal name is, check with the kid’s parents.

Buying an electronic savings bond as a gift is the other option, but this is a clunky process, so brace yourself.

The child, the parent and you will all need to have TreasuryDirect accounts, and you’ll need to know the child’s full legal name and social security number.

Buying an electronic savings bond as a gift is the other option, but this is a clunky process, so brace yourself

First, sign in (or sign up) to your TreasuryDirect account.

Choose the bond you would like to purchase and add a new registration.

Enter the gift recipient’s name and social security number in the registration page.

Mark the box “This is A Gift”.

Complete the purchase to find the savings bond in your account’s Gift Box area.

Now, you’ll have to wait five business days before actually sending the gift over.

Once the five days are over, head back to your account and go to your Gift Box area.

Choose the gift you bought and click the Deliver button.

Add the child’s TreasyruDirect account number and confirm the delivery, and the bond will appear in the gift recipient’s TreasuryDirect account.

The gift recipient will also receive an email announcing the gift.

The awkward process to get savings bonds as gifts drives many to seek out other ways of giving monetary gifts.

Potential Value of Savings Bonds as Gifts

The only silver lining is the potential value (although there are some caveats there).

A Series EE Savings Bond comes with a guarantee from the US government that their value will double if you hold them for 20 years at least.

savings bonds potential value

That guarantee makes the bond’s effective interest rate 3.5% per year, not bad for a government backed investment.

There are a few things to consider though. The bonds must be held a minimum of one year and cannot be redeemed before that. If redeemed before five years pass, the bonds incur a penalty equal to the last three months’ interest gains.

That guarantee makes the Series EE bond’s effective interest rate 3.5% per year

And don’t forget, if you don’t hold for 20 years, the interest and earnings could be significantly lower.

How to Cash in Savings Bonds

US savings bonds can be redeemed as soon as they turn 12 months old.

If you cash them in before they are five years old, you will lose the last three months of interest.

To find the current value of an electronic bond that you own, go to the TreasuryDirect website and log in to your account. To find out the value of a paper bond purchased with your tax return, use the TreasuryDirect’s Savings Bond Calculator.

US savings bonds can be redeemed as soon as they turn 12 months old

You can cash in your electronic bonds through the TreasuryDirect website and receive the redeemed funds directly into your bank account.

Some local banks and financial institutions allow cashing in paper bonds at their local branches. Ask your bank if they cash bonds, and make sure to bring an ID with you.

Alternatively, you can send paper bonds to the Treasury department along with FS Form 1522 and get the funds deposited directly to your bank account.

Electronic bonds may be partially cashed in, meaning you can choose to cash in just a portion of a bond that you own, as long as you leave a minimum of $25 in the account.

Cashed in bonds that have earned interest are subject to federal taxes. You will be provided with a 1099-INT form to submit with your yearly tax return when you cash in the bonds.

Cashing in Paper Savings Bonds for a Minor

As the child’s parent or guardian, you can redeem the minor’s paper bond at a local bank.

To redeem, you need to add a written statement stating that you are allowed to redeem the bond on behalf of the child. See additional details on the TreasuryDirect website.

Savings Bond Gift Alternatives

Instead of buying savings bonds as gifts, you can try other ways to invest for kids in your life.

Here are just a few options:

1. Greatest Gift

Greatest Gift is the financial gifting platform for children’s long-term savings. It lets you invest in a child’s financial future in a fun and meaningful way.
Gift receivers get to choose how to use the gift funds and are encouraged to save for the long run.
Greatest Gift provides a frictionless process to send financial gifts for kids' futures.
Financial gifts can be redeemed at UTMA accounts, custodial accounts, 529 plans, high-yield savings accounts, or other bank accounts.

2. Cash & Checks

Perhaps the easiest way to give monetary gifts is to write a check or to give cash gifts.
However, cash & checks have their limitations. Checks are prone to errors and handing over cash bills can signal lack of effort.
While cash can be used for anything, it’s usually spent quickly, not saved. Other options may be preferable if you want the gift to go towards a long-term goal.

3. Gifting Stock

Giving stocks as gifts can have a great impact on the gift receiver, both financially and educationally. A kid-friendly stock can provide a valuable lesson in investing.

However, giving stocks to another person isn’t easy.
You’ll both need to have brokerage accounts, and you may need the gift receiver’s social security number as well.

4. 529 Plan Contribution

529 plans are a popular way to save for college and other higher education.
You can make a contribution to an existing 529 plan or open a 529 plan that you manage for a child.

529 plans have a lot of potential upsides to them. Money in the account is usually invested and grows in a tax free way, as long as withdrawals are used to pay for qualified expenses.

5. Custodial Brokerage Account Contribution

Custodial brokerage accounts, AKA UTMA accounts, are custodial investment accounts owned by a minor and managed by an adult until the child comes of age.
Money held in UTMA accounts can be used to purchase stocks and other investments and grow over the lifetime of a child.
Most UTMAs don’t allow direct gifting into their accounts. Instead, you can useGreatest Gift to send money to the parents and have them redeem the funds at the child’s investment account.

Other Savings Bonds FAQ

Can You Buy Savings Bonds at Banks

Banks used to sell paper savings bonds at their branches, but stopped when the IRS ceased the selling paper bonds and moved to primarily selling the electronic version.

The only way to buy a paper bond these days is through your yearly tax return with tax form 8888.

What Happens to Savings Bonds When Kid Turns 18

Kids that have a minor linked TreasuryDirect account under their parents can set up their own account when they turn 18.

Once that happens, the parent can de-link the minor’s account and transfer all the securities held in the account to the former-minor’s new account.

The young adult can now choose what to do with the bonds – redeem them, partially redeem them, or keep them until they mature.

How Much is a $100 Savings Bond Worth

Savings bonds are sold at face value, meaning a $100 savings bond can be purchased for $100.

The bonds earn interest on top of their original face value. They can earn interest for up to 30 years or until you cash them in.  

How much a $100 Savings bond is worth depends on the bond’s series and age.

When you cash in a bond, you get the original value plus any interest it earned over the years.

How much a $100 Savings bond is worth depends on the bond’s series and age.

To see the value of an electronic bond you own, log in to your account.

To see the potential value of another bond, check out the savings bonds calculator.

Are Savings Bonds a Good Baby Gift?

Savings bonds are safe, can provide a good rate of return, and encourage long-term savings.

However, giving a Savings Bond as a gift is a difficult process.

You, the baby’s parent, and the baby will all need to have a TreasuryDirect account, and you’ll need to provide the baby’s full legal name and social security number.

However, giving a Savings Bond as a gift is a difficult process.

The website is old, and you’ll need to hold the gift in your account for five business days before you can “deliver” the gift.

To get a paper savings bond, you’ll need to time the gift with tax season.

Instead, consider getting a different financial gift and check out Greatest Gift’s financial gifting platform for children’s long term savings.

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