How to Buy Bonds for Kids

In today’s fast-paced world, understanding money management is more crucial than ever. With the rise of technology and the availability of investment options, parents have a unique opportunity to introduce their children to the world of finance. Bonds, in particular, are a fantastic starting point, offering stability and a guaranteed return, making them a suitable investment for young, aspiring investors.

However, navigating the bond market can be tricky, especially for beginners. Here is everything you need to know about savings bonds for kids, including what they are, how they work and what benefits they provide. 

What Are Savings Bonds?

Savings bonds are a specific type of treasury bond. A treasury bond is a blanket term for any bond issued by the United States Treasury.

When you purchase a savings bond, you are loaning money to the federal government. As part of the purchase agreement, the U.S. government promises to return your money after a predetermined period of time, usually 20-30 years. In addition to getting your money back, you will also earn interest payments for the life of the bond.

While savings bonds for kids offer a guaranteed return and fixed maturation date, they do not provide returns at a high rate. Certain types of bonds only double in value over the maturation period, which is a relatively meager return considering your money is tied up for decades.

How Do Savings Bonds for Kids Work?

Savings bonds for kids are kind of like reverse loans. Traditionally, you would take out a loan and the lender (such as a bank or credit union) would require you to make principal and interest payments during the agreed-upon repayment period. 

With bonds, you are the lender and the U.S. government promises to repay you at the end of a predetermined time period, which is usually referred to as a maturation period. The government also promises to pay interest on the amount you loaned them. 

In the past, the U.S. government sold paper EE bonds at half of their face value, meaning you would pay $50 for a $100 bond. Today, most bonds are purchased electronically at their face value, meaning you must pay $100 to purchase a $100 bond.

You can still purchase paper Series I savings bonds with your IRS tax refund. These bonds are purchased at their face value and are available in increments ranging from $50 to $5,000.

When you purchase bonds, you must designate an owner. In most cases, you would designate the child as the owner, but if you want the parents to be able to use the money for the child’s college expenses, you may need to designate them as the owner instead. 

Benefits of Buying Savings Bonds for Kids

Savings bonds for kids offer plenty of benefits. Specifically, this investment tool is useful for:

• Teaching kids about investing: Providing children with bonds gives them the opportunity to watch the investment grow over a period of years. 
• Setting up your children’s financial future: Bonds can be a great addition to a child’s portfolio. By proactively managing your child’s investment portfolio, you can lay the foundation for a healthy financial future. 
• Providing tax advantages: The interest earned on savings bonds is exempt from state taxes in most jurisdictions. However, the recipient will have to pay federal income tax on the interest. 

While there are numerous benefits associated with bonds for kids, there are a couple of potential drawbacks to be aware of. First, you need a separate account to purchase and manage your bond purchases. Additionally, they offer a lower rate of return compared to more risky investments like stocks. 

Types of Savings Bonds

There are two types of savings bonds, which include:

Series EE Bonds

Series EE bonds earn a very low interest rate, but the government guarantees they will double in value if you hold them for 20 years. However, they do not offer built-in protections against inflation. 

Series I Bonds

Series I bonds are designed to protect you from inflation. They earn a fixed interest rate and a variable interest rate that is set every six months based on the current inflation rate. For instance, Series I savings bonds issued between May 1 and Oct. 31, 2024, have a fixed rate of 1.30% and a variable rate of 4.28%.

How to Buy Savings Bonds for a Child

Buying Treasury bonds is a straightforward process. First, you need to create a TreasuryDirect account. From there, link your bank account data and select how much you want to invest in bonds. 

If you are purchasing savings bonds for kids, make sure to have some basic identifying information on hand, as you will need to register them as the owner. They will also need a TreasuryDirect account to manage their electronic bonds. 

When to Cash in Savings Bonds

Series EE and Series I bonds must be held for at least 12 months after the date of purchase. After that time, they can be cashed in.

However, cashing in either type of bond before the 5-year mark will result in a penalty. The recipient will forfeit the previous 3 months of interest for redeeming the bonds early. For instance, if your child cashes in the bond after 48 months, they will only be paid 45 months of interest payments. 

Where to Redeem Savings Bonds

When the U.S. Treasury issued paper bonds, they could be redeemed at most banks and some credit unions. However, electronic bonds can only be cashed in on TreasuryDirect. 

When redeeming savings bonds, owners have the option to cash out part or all of a bond. But the Treasury requires that owners cash out at least $25. When cashing out part of a bond, owners will only be paid the interest for that portion. 

For instance, let’s say your child has a $1,000 savings bond that has accrued $100 in interest. If they cash out $500 of the bond’s value, they will also receive $50 of the accrued interest.  

Should I Open a Savings Account or Purchase Savings Bonds for My Kids?

Savings bonds typically have a higher interest rate than savings accounts, meaning your children will enjoy a stronger return. However, savings accounts offer better liquidity, as the money doesn’t have to remain in the account for as long. 

There are benefits and potential drawbacks to each option. If you have the ability to do so, you may want to invest in both. By doing so, you can teach your children more about savings and help them successfully navigate the financial challenges of adulthood. 

Frequently Asked Questions