Giving savings bonds as gifts
I'm considering buying savings bonds as holiday gifts for my nieces and nephews. Are they a safe and worthwhile investment?
Savings bonds are guaranteed by the U.S. Treasury Department and safe from today's financial turmoil. While it may seem old-fashioned, giving savings bonds is a good way to teach kids about investing and could give them something to look forward to when they're older.
But it could become problematic later, as assets in a child's name could hurt their chances of qualifying for things like college financial aid.
There are two kinds of savings bonds that can be bought as gifts: Series EE and Series I. Paper Series EE savings bonds are popular, mostly because they can be purchased at half of their face value. In other words, a savings bond with $100 printed on it will cost you only $50.
Interest rates for Series EE bonds are fixed for 20 years before the Treasury has the right to adjust it. Currently, the rate is 1.2 percent for bonds purchased through April 30, 2010.
The rate for Series I bonds, purchased online via TreasuryDirect.gov, is higher. It's set at 3.36 percent through the end of April, but it adjusts the last six months of every year based on the national rate of inflation. Because Series I bonds don't include any kind of paperwork, they may not make a great gift. And unlike the Series EE bonds, they are sold at face value rather than half.
Both types of savings bonds earn interest for 30 years. They cannot be cashed out until you (or the person you give them to) has owned them for a year, and there are penalties if you redeem them before five years are up.
When buying the bonds, you'll need to give a Social Security number, which won't be used for tax purposes but to track the bonds if they are ever lost. You may want to use the child's Social Security number: In 30 years, they may not think to check for a lost bond under Uncle Fred's.
Choosing whose name to use to set up a bond is where things start to get tricky, said Tom Adams, author of Savings Bond Advisor. Savings bonds are exempt from state and local income tax. But, they count as assets of a child or the child's parents when it comes time to apply for financial aid for education and other purposes. Government agencies that require recipients to have limited assets routinely check for savings bonds.
A $50 gift shouldn't affect eligibility. If you give larger gifts, you should consider whether it will hurt the recipient in the future, he said.
Giving savings bonds as gifts may be a gamble for other reasons, Adams said. Families often squirrel them away and forget them or, worse, cash them in without letting the child know.
Still, it's nice to think that when your small relatives are old enough to cash in their small fortune, they'll think of you. And savings bonds don't have to be limited to those too young to open a bank account — some adults you know may not mind having a stash of money to look forward to, either.