financial literacy

Savings Bonds for Kids: What You Need to Know

Buying a savings bond is like making a loan to the government, and you earn interest. Here’s what you need to know about savings bonds for kids.

Last updated:

May 8, 2022

EarlyBird helps parents, family, and friends collectively invest in a child’s financial future. Learn more.

What You'll Learn

When you’re looking for the perfect present for a child in your life, a financial gift is always a great option. You can show them you love them while also making a meaningful contribution to their future.

When you’re making a financial gift, it might be easiest to simply slip some cash into an envelope. But those gifts are often short-lived, quickly spent, and forgotten about. 

Luckily, there are some other gift options that offer the same sentiment but with a bit more longevity — and the opportunity to earn interest.

A savings bond purchased through the US Treasury Department allows you to make a monetary gift to a child in your life today, while also investing in their future life and goals. 

With that said, savings bonds have limited growth potential, compared to other investments like stocks or real estate. Savings bonds are somewhat of an “old school” investment. More modern investments like stock market index funds are typically more lucrative. 

Are you wondering whether a savings bond is the right gift for the child in your life? Keep reading to learn what savings bonds are, the pros and cons of buying savings bonds for kids, and some alternatives to consider if a savings bond isn’t quite right for you.

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What is a Savings Bond? 

A savings bond is a security offered by the US Treasury Department. It’s a low-risk investment that pays interest.

labeled example of a savings bond
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Buying a savings bond is essentially like loaning money to the government. You buy the bond, and the government promises to pay you back after a period of time. You’ll also earn interest payments along the way. 

Savings bonds can be bought electronically on TreasuryDirect, the US government’s official treasury bond website. They can be purchased for yourself or given as gifts.

Savings bonds for kids are a popular financial gift option. They are a safe, low-risk investment that pays a predictable interest rate, and their prices do not fluctuate with the stock market. 

However, savings bonds offer a relatively low return on investment compared to some of the best investments for kids (like stocks).

Note: The term “savings bonds” may also refer to bonds in general. Bonds work similarly to savings bonds, but standard bonds can be issued by governments, companies, or even local counties and cities. Bonds may also be purchased in mutual funds or ETFs. This article will focus on the specific savings bonds offered by the US government (Series I and Series EE savings bonds). 

How Savings Bonds Work

You can think of savings bonds like loans in reverse. You buy the bond, and the US government promises to pay you back in full after a specific period of time — and promises to pay you interest. 

There are two types of savings bonds available from the US government:

  • Series EE Bonds: These bonds earn a low rate of interest but are guaranteed to double in value if held for 20 years. 
  • Series I Bonds: Also known as “I-Bonds,” these securities pay interest based on the current rate of inflation. The interest rate changes every 6 months.

The way they earn interest is the main difference between these two types of bonds. Both of these bond styles are purchased at face value directly from TreasuryDirect. 

“Face value” means that if you buy a $1,000 bond, it will cost you $1,000. When you redeem the bond, you’ll get your money back — plus interest. Some other types of bonds are purchased at a discount, i.e., a $1,000 bond for $950. With savings bonds, they are always sold at face value. 

You can later redeem that bond after the minimum holding time (1 year) or keep them until they stop earning interest (30 years). You can technically keep the bond even longer than 30 years, but it will no longer earn additional interest. 

How do I-bonds work?

Minimum purchase: $25 for electronic; $50 for paper

Maximum purchase: $10,000 per year (electronic); $5,000 per year (paper)

Interest rate: Hybrid rate with a low fixed rate, plus a variable rate based on the current rate of inflation

Minimum ownership length: 1 year

Interest-earning period: 30 years, or until redeemed, whichever comes first

Early redemption penalty: Before 5 years, forfeit the previous 3 months of interest; after 5 years, no penalty

Tax considerations: Interest is subject to federal income tax but is exempt from most state/local taxes; interest may be excluded from federal taxes if used to pay for educational expenses (see details here).

I-Bonds, otherwise known as Series I Bonds, pay a rate of interest largely based on the current inflation rate. 

Essentially, this bond is designed to help preserve the purchasing power of your money by keeping up with inflation. 

If inflation is high, I-bond interest rates can be attractive. However, it’s important to note that the I-bond interest rate changes every 6 months and is based on the current rate of inflation as measured by the consumer price index, or CPI-U.

I bond interest rates
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Series I Bonds have a hybrid interest rate with two components:

  • Fixed rate: This is a set rate that is locked in for the life of the bond. It’s currently 0%.
  • Inflation rate: This is a variable rate that changes every 6 months and is based on the current rate of inflation. It’s currently 7.12%. 

The inflation rate is changed twice per year — on the first business day of May and on the first business day of November. The government sets the rate based on the official inflation rate data from the Bureau of Labor Statistics. 

The total interest you earn will be the fixed rate plus the inflation rate. Because the fixed rate is currently 0%, the only interest comes from the inflation rate (but this may change if the fixed rate is increased). 

Interest compounds semi-annually. This means that every 6 months, the interest you’ve earned will be added to the bond’s value and will therefore increase the future interest you earn. 

How do Series EE bonds work?

Minimum purchase: $25

Maximum purchase: $10,000 per year 

Interest rate: Fixed rate (currently 0.1%). Additionally, EE bonds are guaranteed to double after 20 years (which works out to around 3.5% if held for 20 years)

Minimum ownership length: 1 year

Interest-earning period: 30 years, or until redeemed, whichever comes first

Early redemption penalty: Before 5 years, forfeit the previous 3 months of interest; after 5 years, no penalty 

Tax considerations: Interest is subject to federal income tax but is exempt from most state/local taxes; interest may be excluded from federal taxes if used to pay for educational expenses (see details here).

The Series EE bond is a unique savings bond that doubles in value if held for 20 years.

Series EE savings bond
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The interest rate EE bonds earn is quite low (currently 0.1%). However, if the bond is held for 20 years, a one-time adjustment will be made to ensure that the value of the bond has doubled. 

If you hold a Series EE bond for 20 years, it will double in value. This is equivalent to an interest rate of around 3.5%. 

However, if you don’t hold it for 20 years, you’ll earn only the lower interest rate at the time of purchase. 

This is a stark contrast:

  • A $1,000 EE bond held for 20 years would be worth $2,000
  • A $1,000 EE bond held for 19 years would be worth only $1,019.17 (based on current interest rates) 

Because of this unique interest structure, EE bonds typically make the most sense if they are going to be kept for 20 years. Otherwise, Series I bonds will likely have higher overall returns. 

How do you redeem savings bonds?

The owner of a savings bond can redeem it through their TreasuryDirect account online. Once redeemed, the initial purchase amount, plus any accrued interest, can be transferred to a connected bank account.

Keep in mind that both EE and Series I bonds have a minimum 1-year holding period. You cannot redeem them for the first 12 months.

If you redeem a savings bond within the first 5 years, you’ll pay a small penalty. This is currently the last 3 months of interest. 

For example, if you redeem an I-bond after 20 months, you’ll actually only receive interest for 17 months — you will forfeit the final 3 months’ interest as an early redemption penalty. 

Pros and Cons of Savings Bonds for Kids 

There are advantages and disadvantages to consider with savings bonds. Here are the key points to remember. 

Pros

A low-risk investment: Savings bonds are guaranteed by the faith of the US Government. They will not lose value unless the government collapses and defaults on its debt (which is highly unlikely). Unlike riskier investments, like stocks, you cannot lose money with a savings bond.

A long-term gift for a child: Savings bonds can help magnify your financial gift by growing over time. They are a practical monetary gift that can help set a child up for a brighter financial future.

No commissions or fees: Savings bonds are purchased from TreasuryDirect rather than through a stockbroker. There are no fees or commissions charged for purchases or redemptions. 

Tax advantages: Interest earned on savings bonds is exempt from most state and local taxes. However, federal income tax is still due on the interest payments. 

Cons

Low rate of return: In general, savings bonds have a lower rate of return than more aggressive investments, such as stocks. This is the tradeoff investors must make in exchange for lower risk. 

Requires a separate account: You can only buy savings bonds through TreasuryDirect. You cannot purchase them in your normal brokerage account or a child’s custodial account

Minimum holding periods: For both Series I and Series EE bonds, the owner cannot redeem them for a minimum of 1 year after purchase. 

Interest penalties: For both types of savings bonds, there is a penalty if you redeem them before the 5-year mark. You will forfeit the last 3 months of interest for these early redemptions. For example, if you redeem an I-Bond after 25 months, you will only be paid for 22 months of interest. 

Adjustable rate: For I-bonds, the interest rate changes every 6 months. Regardless of what inflation rate was listed when you purchased it, you’ll only earn that rate for the next 6 months. After that time frame, rates will change to whatever the current inflation rate is. Series EE bonds, on the other hand, have a fixed interest rate that does not change. 

How to Buy Savings Bonds for Kids 

Savings bonds on TreasuryDirect
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Savings bonds must be purchased on TreasuryDirect.gov. This is the only way to buy electronic savings bonds. 

Physical Series I savings bonds can also be purchased with your tax refund — but only if you’re owed a refund. This is the only way to buy physical paper bonds, so it’s wise to stick with electronic bonds. 

You can buy a savings bond for yourself or for someone else. The recipient can be added as an “owner” or as a “co-owner” of the bond. The recipient can be any age, so you can gift savings bonds to children easily. 

However, the recipient must have a TreasuryDirect account already set up. If they don’t, you must open the account before buying the bond. Children will need to set up a minor-linked account, which must be opened with the help of a parent or guardian.

The purchaser must also have their own TreasuryDirect account. So both you and the child will need an account opened. 

To buy savings bonds for kids, you must have the following information:

  • The child’s full name
  • The child’s social security number (SSN)
  • The child’s TreasuryDirect account number

If you don’t have the child’s social security number (or tax ID), you must get it from the parents. There is no way to purchase savings bonds in someone else’s name without having their tax ID number.

Keep in mind that treasury bonds purchased as gifts will need to stay in the purchaser’s account for 5 days before being transferred to the recipient. 

Optionally, you can print out a gift certificate explaining the savings bond gift. You will still need to complete the online steps above, however. 

Here’s a video breakdown of how to buy gift savings bonds produced by TreasuryDirect. 

Keep in mind that you cannot buy or sell savings bonds on the open market or through stock brokerage accounts. Savings bonds can only be purchased on TreasuryDirect and only redeemed on TreasuryDirect (after the 1-year waiting period).

Alternatives to Buying Savings Bonds for Kids 

There are many different investment options for meaningful gifting. Here is an overview.  

Categories of investments
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Stocks: Stocks have historically been one of the best long-term investments. On average, the US stock market has returned around 10% per year since its inception. Investors can choose from individual stocks (like Netflix or Coca-Cola) or buy stock market index funds, which hold hundreds of different stocks. 

Children can’t buy stocks directly, but they can own them through a custodial investment account. These accounts are set up by an adult and are transferred to the child once they become a legal adult. 

Other bonds: Savings bonds aren’t the only type of bond out there. The US government offers various treasury notes and bonds — and local governments, companies, and foreign governments also issue bonds. 

Investors may also choose to buy bond index funds, which invest in hundreds of different bonds. Many bonds can be purchased in brokerage accounts. 

Cryptocurrency: Cryptocurrency is a form of digital currency. Bitcoin (BTC) and Ethereum (ETH) are the two most common and most traded currencies. Crypto is a high-risk, high-reward investment. 

You can buy crypto through EarlyBird crypto or through a crypto exchange like Gemini. 

Certificates of Deposit (CDs): Certificates of deposit are similar to savings bonds, except they are sold by banks and credit unions. You can buy a CD that locks your money up for a certain period of time (anywhere from 3 months to 10 years), and you’ll earn interest on it. 

Cash: You can never go wrong with cash as a short-term gift. However, keep in mind that cash is a gift that is likely to be spent rather than saved. It’s not suitable as a way to help create a stable financial future for a child.

The Bottom Line

Buying savings bonds for kids comes with plenty of benefits. They can grow steadily over time and might also help teach kids about the value of saving money. Savings bonds also benefit from being one of the simplest and lowest-risk investments you can buy.

But savings bonds also have some downsides, most notably, the low potential return. The good news is that if you decide a savings bond isn’t the right gift for the child in your life, there are several attractive alternatives to consider. 

For a wider range of investment options, check out EarlyBird. EarlyBird makes it simple to build a diversified portfolio of investments with stocks, bonds, ETFs, and even cryptocurrency. EarlyBird accounts are custodial investment accounts that automatically transfer to the child’s control once they reach adulthood. 

Download EarlyBird in the app store today to start saving for the kids you love. 

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This page contains general information and does not contain financial advice. All investments involve risk. Any hypothetical performance shown is for illustrative purposes only. Actual investment performance may be different for many reasons, including, but not limited to, market fluctuations, time horizon, taxes, and fees. Please consult a qualified financial advisor and/or tax professional for investment guidance.

Author

EarlyBird Team

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INVEST EARLY, GROW TOGETHER
Download EarlyBird today and start investing in your child’s tomorrow.
INVEST EARLY, GROW TOGETHER
Download EarlyBird today and start investing in your child’s tomorrow.
INVEST EARLY, GROW TOGETHER
Download EarlyBird today and start investing in your child’s tomorrow.