Investing in Our Children’s Futures: Are Savings Bonds Best?
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 instance, a $ 50 bond can be purchased for $ 25 and attain a reasonable value of $ 50 somewhere down the line. 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, given as gifts, are a nice sentiment an are nifty gifts kids can hold onto. 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. Bonds can accumulate value faster or slower, depending on the date of purchase and what course the economy takes over time. Since May 1st of 2005, bonds are assigned a fixed rate at the time of purchase. If you own bonds and want to know their value you can check on the 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. There are tax considerations, however. Interest earned on the bond is taxable in the year it’s redeemed. Parents can redeem bonds for their children with a bit more writing and signing to verify that they are the parent with legal custody. All in all, it is a very easy process.
Are bonds the best gift for 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. Bonds purchased since 2001 with variable interest rates, typically earn a yield annually between 1.6% and 2.5%. Fixed rate bonds bought after May 2005 aren’t much better. If you were to take that original $ 50 - $ 100 and place it in a mutual fund the return on investment could triple in the short run and well out perform the bonds over the child’ s entire childhood. Granted, the mutual fund would be in an adult’s name, lose the patriotic feel, and does have risk involved. You may have to ask what’s best for the child - a cool piece of paper, or money for college?