Debt Conoslidation Articles

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

How savings bonds work

U.S. Savings Bonds have several types, and values of $ 25 up 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 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 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 few securities that can be established in the name of a minor.

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 look up the type of bond, the face value, and the month and year of purchase, and the calculator will show you the current value.

How to redeem bonds

Bonds are easy to redeem at almost any financial institution. Make sure you have proper ID and you simply sign it, and get the cash. 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 is true that bonds can be issued in the child’s name, have a very patriotic sheen, and are a very safe investment. That said, if you look at the interest bonds are earning, there could be better things to do with your investment in your 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 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, 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?