Savings Bonds: The Best for Our Children's Futures?
How savings bonds work
U.S. Savings Bonds have several types, and values of $ 25 up to $ 10,000. Bonds heretofore were bought at half the face value, and accrued interest until a maturity date, when they'd be worth face value or better. For instance, a $ 50 bond can be purchased for $ 25 and attain a reasonable value of $ 50 somewhere down the line. It was a nice gift for babies because by the time they graduated high school the bond would have matured and the young adult could cash it in for face value. Bonds, given as gifts, are a nice sentiment an are nifty gifts kids can hold onto. In fact, bonds are one of the only securities which can be held in a minor’s name.
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 wasn't any change in the bond's value, just a more patriotic sounding name printed on the front. Prior to May of 2005, bonds accumulated interest at a variable rate based on the treasury yields over a 5 year period. 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 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 type in the type of bond, face value, and the month/year purchase date and the calculator will show you the current value of that bond.
How to redeem bonds
Bonds are easy to redeem at almost any financial institution. Just have proper ID and you simply sign them and cash them in. 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's true that bonds can be issued in a child's name, they have a patriotic look, and are safe investments. However, if you look at the interest that bonds are earning there might be better things to do with your contribution to the 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 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. You may have to ask what's best for the child – a cool piece of paper, or money for college?
Tags: finance education, redeem bonds, saving bonds, U.S. saving bonds, young children