Buying savings bonds can be a great way to help save for your grandchildren’s future education costs or other expenses. Savings bonds earn interest over time and are backed by the U.S. government, making them a low-risk gift option. There are a few things to consider when purchasing savings bonds for grandchildren such as which types of bonds to buy, how much to invest, registering the bonds properly, and understanding the tax implications. With some planning, savings bonds can be an excellent addition to your grandchild’s long-term savings.
What are the benefits of buying savings bonds for grandchildren?
There are several key benefits to buying savings bonds for grandchildren:
- Savings bonds are guaranteed by the U.S. government, so they are considered a very safe investment.
- Interest earnings are exempt from state and local taxes.
- You can defer federal tax on the interest until the bonds are cashed, allowing compound interest to build up over time.
- Bonds can be purchased in small denominations, making them accessible to many grandparents.
- Interest rates are fixed, so you don’t have to worry about market fluctuations.
- Bonds can be cashed anytime after 12 months, providing flexibility.
- Bonds earn interest for up to 30 years, providing a great long-term savings option.
In short, savings bonds offer a fixed return on a government-guaranteed investment that can help build a nice nest egg for a grandchild over time. The tax-deferred growth is a particularly nice perk.
What types of savings bonds should I purchase?
The U.S. Treasury currently offers two main types of savings bonds:
- Series EE bonds – These bonds earn a fixed rate of interest. The EE bond rate is announced twice per year by the Treasury. All EE bonds issued in a given six-month period earn the same interest rate for the life of the bond.
- Series I bonds – These bonds have interest rates made up of two components: a fixed rate that remains the same for the life of the bond, and a variable semiannual inflation rate. The fixed rate component provides a guaranteed base return, while the variable component provides protection against inflation. Interest is compounded semiannually.
For most savers, Series I bonds are the better choice because they help guard against inflation eating away at your returns. The interest rates on I bonds are generally lower than on EE bonds, but the inflation adjustment makes them a smarter long-term investment in most cases.
Some key things to know about I bonds:
- You can purchase up to $10,000 in I bonds per year electronically through the U.S. Treasury.
- I bonds must be held for at least 12 months, and you’ll pay a penalty for cashing them in before 5 years.
- If used for education, I bond interest can be exempt from federal income tax if certain conditions are met.
Unless you need the guaranteed fixed return of an EE bond, opting for I bonds is generally the best approach when buying savings bonds for grandchildren.
How much should I invest in savings bonds for my grandchildren?
Determining how much to invest in bonds depends on a few factors:
- Your budget – How much can you afford to commit to bond purchases each year? Bonds start at just $25 each.
- Your grandchild’s age – The younger they are, the more time bonds have to grow.
- Future education costs – Will you help pay for college? Consider how much you may want to contribute over the years.
- Your grandchild’s other expected needs – Do you want to help with a first car, weddings, etc.?
Some guidelines that may help frame your thinking:
- Aim to buy the maximum $10,000 in I bonds per year if you can afford it. This maximizes the tax-deferred growth potential.
- Think about spreading smaller purchases over birthdays and holidays rather than buying bonds all at once.
- Buying bonds for education? Consider trying to buy enough to cover at least 2 years of projected college costs over time.
- For young grandchildren, consider estimates for college starting around age 18 to determine totals to shoot for.
Run some numbers to come up with a plan that fits your financial situation. Dollar-cost averaging with periodic smaller purchases is a smart strategy.
How do I buy paper savings bonds for grandchildren?
For those who prefer to gift physical paper bonds, you can buy savings bonds for grandchildren by:
- Going to a local bank. Many banks sell paper savings bonds.
- Setting up a TreasuryDirect account online and purchasing paper bonds to be mailed to you.
- Calling TreasuryDirect at 844-284-2676 to purchase over the phone.
You’ll want to provide the grandchild’s Social Security Number when purchasing paper bonds so that they can be properly registered to your grandchild.
One downside of paper bonds is that they can be lost, stolen, or destroyed. Some tips:
- Consider keeping the bonds in a safe deposit box rather than giving them directly to the grandchild.
- Photocopy the fronts and backs of any paper bonds purchased and keep in your records.
- Consider gifting the bonds to the grandchild later and retaining them yourself initially to protect against loss.
For bigger convenience and safety, many grandparents opt for buying electronic bonds instead.
How do I buy electronic savings bonds for my grandchild?
Purchasing electronic bonds for grandchildren is very straightforward:
- Set up a TreasuryDirect account online at treasurydirect.gov.
- Purchase up to $10,000 in I bonds per year for your grandchild through the TreasuryDirect site.
- Gift the bonds to your grandchild’s TreasuryDirect account so they become the owner.
Some key things to know about gifting electronic bonds:
- Your grandchild must have a TreasuryDirect account in order to receive the gift bonds.
- You’ll need your grandchild’s Social Security Number and other registration details to complete the gift bond transfer.
- Gift bonds become the property of the recipient grandchild.
Electronic bonds simplify record-keeping and eliminate concerns over physically losing bonds. However, check that your grandchild’s parent is prepared to set up a TreasuryDirect account on behalf of their child if needed. This allows you to then gift the electronic bonds you purchase.
How should I register savings bonds I purchase for my grandchildren?
You’ll need to provide your grandchild’s Social Security Number when purchasing savings bonds, whether electronically or on paper. Here are the two approaches to registration:
Single Owner Registration
Registering a paper or electronic bond solely in your grandchild’s name and Social Security Number. For example:
John Smith SSN 123-45-6789
This approach transfers full ownership immediately to the grandchild but has a few drawbacks:
- You lose the ability to manage the bonds yourself.
- Very young grandchildren may be unable to cash bonds on their own when needed.
- There is risk of loss if a paper bond is physically lost.
Beneficiary Registration
Registering a bond in your name and Social Security Number, adding your grandchild as the bond beneficiary. For example:
Mary Smith SSN 987-65-4321, Payable on death to John Smith SSN 123-45-6789
This approach avoids the issues above but has some other considerations:
- You’ll need to manually gift the bonds later by transferring ownership to your grandchild when appropriate.
- Bonds may be subject to estate taxes if not transferred before your death.
In most cases, registering savings bonds with your grandchild as the payable on death (POD) beneficiary offers the right balance of control and transfer flexibility. Just be sure to eventually gift the bonds so they avoid probate.
Should I gift savings bonds right away or wait?
Many grandparents opt to purchase bonds but hold off on formally gifting them right away for a few reasons:
- Very young grandchildren may not be able to manage bonds themselves.
- Waiting to transfer bonds gives you flexibility in case financial needs change.
- You can transfer bonds at strategic times, like when needed for education expenses.
Holding off on gifting bonds also allows you to:
- Make sure bonds aren’t lost if you retain possession.
- Potentially utilize the education tax benefits if bonds aren’t cashed early.
That said, gifting bonds irrevocably does provide certainty. The child will know bonds are coming their way. And any potential estate issues are also avoided.
Consider your grandchild’s age and your own financial situation when deciding on the right time to formally gift over savings bond ownership.
What are the rules around savings bond transfers and gifting?
The Treasury allows savings bond owners to gift their bonds to others in a couple ways:
Gift During Life
You can gift savings bonds to your grandchild during your lifetime by:
- Completing a gift transfer form for paper bonds.
- Electronically transferring bonds to your grandchild’s TreasuryDirect account.
Bonds transferred this way immediately become the property of the recipient grandchild.
Gift on Death
You can name your grandchild as the payable on death (POD) beneficiary when purchasing bonds:
- At your death, your grandchild can redeem the bonds.
- For paper bonds, your grandchild will have to submit a claim with a copy of the death certificate.
- No inheritance taxes apply to savings bonds gifted on death.
One thing to note is that transferred paper savings bonds must be re-registered by your grandchild to convert to electronic bonds.
What are the tax implications of savings bonds for grandchildren?
Gifting savings bonds impacts taxes in a few key ways:
Federal Income Taxes
Interest earned on savings bonds is exempt from state and local income taxes. And bond interest accrues federally tax-deferred until bonds are cashed.
At redemption, the bond interest is subject to federal tax. However, if used for college, the bond interest may still be tax-free if qualified educational expenses exceed the redemption amount that year.
Estate and Gift Taxes
There are no federal gift tax consequences for gifting savings bonds during your lifetime or at your death. Gift transfers are not subject to the annual gift tax exclusion limit.
Savings bonds pass free of federal estate taxes when gifted to beneficiaries on death.
State Estate Taxes
While there are no federal estate taxes on gifted bonds, a handful of states do impose their own state-level estate taxes. Some states may treat savings bonds as taxable assets at death even when gifted as POD. Check your particular state’s rules.
What are some alternatives to savings bonds for grandchildren?
Savings bonds offer unique advantages but aren’t the only option. Some other ways to save for grandchildren include:
529 College Savings Plans
These state-sponsored plans offer tax-deferred growth and tax-free withdrawals for qualified education expenses. While not as safe as bonds, 529s do provide more investment options.
Custodial Accounts (UTMA/UGMA)
Custodial accounts let you invest on behalf of minor children with flexible investment options. However, transfers are irrevocable and the child takes full control at the age of majority.
Trusts
Setting up an irrevocable trust offers you more control over how assets are eventually distributed to grandchildren. However, trusts cost more to establish and administer.
Cash Gifts
Simple gifts of cash on birthdays and holidays can help build savings over time. But without the restrictions of bonds, money could be spent rather than saved.
Compare all options against your financial and estate planning objectives when mapping out a savings strategy for your grandchildren.
Conclusion
Gifting savings bonds can benefit grandchildren in many ways while also avoiding taxes and estate complications. Following the guidance around purchase methods, registration, transfers, and taxes will help ensure the process goes smoothly. Just be sure to work through the pros and cons of gifting timing and weigh bonds against other savings vehicles. With some prudent planning, the gift of savings bonds can give your grandchildren a nice financial leg up as they enter adulthood and beyond.