Whether you’re celebrating the arrival of your own child or a loved one’s baby, the occasion often calls for a special gift. If you want something memorable that will help build the little one's financial future, a savings bond might be an ideal gift. The kind of savings bond you buy for a newborn depends on how you want to set up the savings.
Series EE Bonds
Series EE bonds are low-risk savings vehicles, available for purchase through the Treasury Direct website. Bonds purchased before 2005 will yield interest at current market rates. Bonds purchased since May 2005 return a fixed interest rate. As of Jan. 1, 2012, consumers can buy Series EE bonds only in electronic form – no more paper bonds. The most significant change in the discontinuation of paper EE bonds is that you buy them at face value instead of half value. When the holder redeems them – a minimum of 12 months later -- he will get the face value back with the interest earned. This means that you can’t buy Series EE bonds at banks anymore either. Series EE bonds have a guarantee from the federal government that they will double in value within 20 years and they will earn interest every month for 30 years. The flat, relatively low interest rate offered on these bonds means that the bond will likely lose value to inflation before a baby grows old enough to redeem it, which makes it among the least attractive choices for a newborn gift.
Series I Bonds
If you have a federal income tax refund that you want to spend, you can use it to purchase paper Series I savings bonds. Series I bonds are also available in electronic form. Both forms are available for purchase at face value. Like EE bonds, the bondholder has to hold Series I bonds for at least 12 months, but the longer they are held, the more interest they’ll accrue – up to 30 years. A major difference with Series I bonds is the interest they earn. These bonds have a fixed rate set at the time of purchase and an inflation-adjusted rate that will determine the final value of the bonds. The inflation protection feature makes these bonds much more attractive for a newborn gift since their value may hold up better during the 18-or-so years the child will hold the bond before redemption.
Savings Bonds as Gifts
When you want to buy either a Series EE or Series I bond for a newborn, create a TreasuryDirect account online. Once you have your account, choose the bond you want to purchase and add the newborn’s full name and Social Security number – parents apply for a newborn’s Social Security number routinely at the hospital before discharge and the Social Security Administration mails the newborn’s Social Security card within 10 days of the baby’s birth. You must wait to purchase the savings bond until you can add the baby’s Social Security number to the purchase information. Enter your payment information into the website and then make a printable gift certificate to present to the parents of the baby. The parents need to create a TreasuryDirect account to receive the electronic savings bond. Ask the parents for their TreasuryDirect account number and enter it into your TreasuryDirect account to deliver the savings bond.
Education Tax Exclusion
The federal government created a program that lets qualified taxpayers avoid paying taxes on interest earned from Series EE and Series I savings bonds when the bonds have issue dates after 1989 and when you use the bond to pay for higher education expenses. There are additional requirements such as the bond being registered in the parent(s) names with the child as a beneficiary, income restrictions (see IRS Form 8815), and the educational institution must meet program requirements. If you opt to purchase the savings bond with this program in mind, check with the parents first to make sure they meet the requirements. Place the names(s) of the parent(s) on the bond with the newborn’s name as the beneficiary and use the Social Security number(s) of the parent(s) for the bond to comply with the Education Tax Exclusion requirements. This program might be particularly attractive if the newborn's parents are college-educated, or if you know that they place a high value on education. Otherwise, the child might be just as well off with the freedom of a Series I bond that can be spent on anything once it's redeemed.
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