I’ve had many parents ask me “what about bonds? Will they help my kids?”
We do not personally use this strategy for our own children and therefore I did not feel I would be the right person to answer your questions. So I’ve asked a colleague of mine, Jennifer Gorton, an expert on bonds and forex, to write a special blog post just for those of you who wanted to know more about how they work and if they will work for you children and teens.
Cheers…Amanda van der Gulik…Excited Life Enthusiast! ;o)
Savings Bonds Remain a Traditional Gift for Children and are Now Online
Written by guest contributor Jennifer Gorton from Forex Traders
The family role of teaching the valuable habit of saving to children has often fallen on the shoulders of grandparents in our culture. Whether the medium is a passbook savings account or savings bonds from the government, grandparents have traditionally given these gifts to their grandchildren, and then used this opportunity to drive home the lesson of saving for a rainy day in the future.
The “teaching moment” can also lend itself to discussing investment principles and the compounding of interest, but most grandparents never take that next step. Stocks, bonds and the world of forex trading are most likely concepts that are too complex to teach to pupils in elementary school. However, the government has made the entire process more “child friendly” of late, and many may want to reconsider this time-honored tradition of supporting one’s country while saving for the future at the same time.
The government has created “TreasuryDirect” that allows you to purchase bonds from an online account and then own them electronically, no paper required. You now may also convert older issued bonds to this e-account status and then review interest returns online. Our grandchildren may be more computer literate than their grandparents, so the teaching moments may go in both directions.
Savings bonds are also one financial instrument that can be registered in a child’s name. It is wise in these instances to file an annual Form 1040 in the child’s name, report the accrued interest for the calendar period, and if below $850, no income tax is due then or later when the bond is actually redeemed.
Savings bonds still operate in the same way. They come in a number of types and denominations from $25 to $10,000. You pay a discounted amount for the bond, and then at a specific date in the future, the bond is worth its face value. For example, you may buy a $50 bond for $25, but at some point later down the road, about the time that your grandchildren will become of legal age, the bond may be redeemed for its face value of $50. Depending on how interest has been reported, federal taxes may be low or nothing. This interest is also exempt from state and local income taxes, and may be totally exempt from federal taxation if the bond is used for educational purposes.
After 2001, the bonds were renamed “Patriot Bonds” and earned interest on a variable basis. After May 1, 2005, bonds were assigned a fixed rate of interest at the time of purchase. In all cases the online service provides a “calculator” for determining accrued interest and the potential value upon redemption.
Part of the allure of gifting savings bonds was also the look and feel of the paper instrument, something never wasted on young children. The value of money and the concept of value itself take time to teach and learn for children, most not fully appreciating the concepts even into their teen years. By moving to an online service, the government may now be more “hip” to passing fashion, but grandparents may miss the opportunity to hand over “pretty pieces of paper” for their grandkids to collect.
The question also has to be asked if this saving process is the best way to accumulate funds for a child’s education. There are other alternatives that receive favorable tax treatment and allow for higher returns provided by other investment mediums. However, savings bonds have a long history in our country built on tradition and patriotism, and receiving one has never been a disappointment.