Are Savings Bonds a Good Investment for Grandchildren?

Savings bonds offer a secure and simple way to contribute to a grandchild’s financial future. These government-backed securities grow in value, potentially providing funds for significant life events. Understanding their specific characteristics helps determine if they align with your gifting objectives.

Understanding Savings Bonds

The U.S. Treasury offers different types of savings bonds, with Series EE and Series I bonds being the most common for individual investors. Series EE bonds provide a fixed interest rate, set at the time of purchase, that remains constant for at least 20 years. The Treasury guarantees that the value of a Series EE bond will double after 20 years. Interest accrues monthly and compounds semiannually, meaning earned interest is added to the principal every six months.

Series I bonds offer a variable interest rate that adjusts every six months, combining a fixed rate with an inflation rate. This design helps protect the bond’s value against rising inflation, and the interest rate is guaranteed never to fall below zero. Both Series EE and Series I bonds reach final maturity 30 years from their issue date, at which point they stop earning interest. While both types of bonds must be held for a minimum of one year before redemption, cashing them in before five years results in the forfeiture of the last three months of interest.

Purchasing Savings Bonds for Grandchildren

Acquiring savings bonds for a grandchild is primarily done through TreasuryDirect, the U.S. Treasury’s online platform. Both the purchaser and the recipient must establish a TreasuryDirect account to facilitate the transaction. For a minor, a parent or legal guardian is required to set up a linked account on their behalf within their own TreasuryDirect profile.

Electronic Series EE and I bonds can be purchased in amounts ranging from $25 to $10,000 per calendar year for a single recipient. After purchasing the bond, it must remain in your TreasuryDirect account for at least five business days before it can be delivered to the grandchild’s account. Gifts of savings bonds are subject to annual gift tax exclusion limits, which for 2025, allow you to gift up to $19,000 per individual without incurring gift tax reporting requirements.

Tax Implications of Savings Bonds for Grandchildren

Interest earned on savings bonds is exempt from state and local income taxes, but it is subject to federal income tax. Taxpayers generally have the option to defer reporting the interest income until the bond matures, is redeemed, or changes ownership. If the bond is registered in a grandchild’s name, the interest income is typically attributable to the child for tax purposes.

Unearned income, such as interest from savings bonds, for children under certain ages may be subject to the “kiddie tax.” For the 2025 tax year, if a child’s unearned income exceeds $2,700, the portion above this threshold is taxed at the parent’s marginal tax rate. The first $1,350 of unearned income is generally tax-free, and the next $1,350 is taxed at the child’s lower tax rate. Understanding these thresholds is important to manage potential tax liabilities for the grandchild.

There is a potential tax exclusion for interest earned on Series EE and I bonds if the proceeds are used for qualified higher education expenses. This exclusion typically applies when the bond owner was at least 24 years old before the bond’s issue date. If a bond is directly registered in a grandchild’s name when they are under 24, the interest generally will not qualify for this education tax exclusion, even if they later use the funds for college. Qualified education expenses generally include tuition and fees, but not room and board.

Redeeming Savings Bonds

The process for redeeming savings bonds depends on whether they are electronic or paper. Electronic bonds held in a TreasuryDirect account can be redeemed directly through the online platform. Paper bonds, while no longer issued, can typically be cashed at most financial institutions.

When a minor owns a savings bond, their parent or legal guardian must be involved in the redemption process. A parent can redeem a bond for a young child who is unable to understand the transaction, provided the parent resides with the child or has legal custody. Bonds cease to earn interest at their 30-year maturity and should be redeemed.

Other Investment Options for Grandchildren

While savings bonds offer a low-risk, government-backed option, other investment vehicles may provide different benefits for a grandchild’s financial future. A popular choice for education savings is a 529 plan, which offers tax-deferred growth and tax-free withdrawals for qualified educational expenses. These expenses can include tuition, fees, room and board, books, and even K-12 tuition up to $10,000 annually. The account owner, often the grandparent, retains control over the assets and can change the beneficiary if circumstances change.

Another option is a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account, which are custodial accounts allowing minors to own various types of assets, including stocks, bonds, and mutual funds. Contributions to these accounts are irrevocable gifts, and a custodian manages the assets until the child reaches the age of majority, typically 18 or 21, depending on the state. At that point, the minor gains full control of the funds, which can be used for any purpose. Income generated within UGMA/UTMA accounts is subject to the kiddie tax rules, similar to savings bond interest.