Purchasing Savings Bonds as a Gift for a Child

Quick answer

• Savings bonds are a safe, government-backed way to gift money to a child.
• You can purchase Series EE or Series I bonds electronically through TreasuryDirect.gov.
• Consider the child’s age and your gifting goals when choosing bond types.
• There are annual purchase limits for individual buyers.
• Understand the tax implications for both the gift giver and the child.
• Bonds held for at least one year are redeemable, but early redemption may have penalties.

Who this is for

• Parents or guardians looking for a secure, long-term savings vehicle for a child.
• Grandparents or other relatives wanting to give a meaningful financial gift for a child’s future.
• Individuals interested in teaching children about saving and investing in a tangible way.

What to check first (before you act)

Goal and timeline

Before buying any savings bonds, define what this gift is for and when the child might need access to the funds. Are you saving for a down payment on a house in 15 years, college in 10 years, or just a general nest egg for adulthood? The timeline will influence your choice of bond and how long you intend to hold it.

Current cash flow

Assess your own financial situation. Can you comfortably afford to purchase savings bonds without jeopardizing your own immediate financial needs or emergency fund? Gifting should not come at the expense of your own financial stability.

Emergency fund or safety buffer

Ensure you have a robust emergency fund in place before committing funds to long-term investments like savings bonds. This fund should cover 3-6 months of essential living expenses. Savings bonds are not liquid assets for unexpected short-term needs.

Debt and interest rates

Review any outstanding debts you have. High-interest debt, such as credit card balances, often carries interest rates significantly higher than the potential returns on savings bonds. Prioritizing paying down expensive debt may be a more financially sound move before investing in bonds.

Credit impact

Purchasing savings bonds does not directly impact your credit score. However, if your decision to buy bonds means you are neglecting other financial obligations or increasing your debt, that could indirectly affect your creditworthiness.

Step-by-step (how to buy savings bonds for a child)

1. Determine the Bond Type: Decide between Series EE bonds (fixed interest rate) and Series I bonds (inflation-adjusted rate).

• What “good” looks like: You’ve considered the current economic climate and the child’s long-term needs to make an informed choice.
• Common mistake: Choosing a bond type without understanding its interest rate structure.
• How to avoid: Read the U.S. Treasury’s descriptions of each bond type carefully.

2. Open a TreasuryDirect Account: All savings bond purchases are made electronically through the U.S. Treasury’s TreasuryDirect.gov website.

• What “good” looks like: You have successfully created and verified your account.
• Common mistake: Incorrectly entering personal information during registration.
• How to avoid: Double-check all details, including Social Security numbers and bank account information, before submitting.

3. Link a Bank Account: Connect your checking or savings account to your TreasuryDirect account for purchasing and redemption.

• What “good” looks like: Your bank account is successfully linked and verified.
• Common mistake: Using a bank account that is not eligible or has insufficient funds.
• How to avoid: Ensure the account is a valid U.S. bank account and has sufficient funds for the purchase.

4. Determine Purchase Amount: Decide how much you want to invest, keeping in mind annual purchase limits.

• What “good” looks like: You know the exact amount you wish to spend per bond.
• Common mistake: Exceeding the annual purchase limit for individual buyers.
• How to avoid: Check the current annual purchase limits on TreasuryDirect.gov for individual buyers.

5. Purchase the Savings Bonds: Navigate to the “BuyDirect” section of TreasuryDirect and select the type of bond and the amount.

• What “good” looks like: The purchase is confirmed, and you receive a confirmation email.
• Common mistake: Accidentally purchasing the wrong bond type or amount.
• How to avoid: Carefully review your order before submitting and confirm all details on the order summary page.

6. Designate the Owner: When purchasing, you will designate the child as the bond owner. You can also add a beneficiary.

• What “good” looks like: The child’s Social Security number and name are accurately entered as the owner.
• Common mistake: Entering incorrect owner information, which can cause issues with redemption.
• How to avoid: Verify the child’s Social Security number and full legal name before proceeding.

7. Consider a Savings Bond as a Gift: You can purchase bonds in your name and then gift them to the child, or purchase them directly in the child’s name if they have a Social Security number.

• What “good” looks like: You’ve chosen the gifting method that best suits your tax and ownership strategy.
• Common mistake: Not understanding the tax implications of gifting bonds in your name versus the child’s name.
• How to avoid: Research the tax rules for gifts and consult a tax professional if unsure.

8. Manage Your Bonds: Log in to your TreasuryDirect account periodically to view your holdings and manage your investments.

• What “good” looks like: You can easily access your account and see the current value of the bonds.
• Common mistake: Forgetting login credentials or not keeping account information updated.
• How to avoid: Use a password manager and ensure your contact information is current.

9. Understand Redemption Rules: Bonds are typically redeemable after one year, with a penalty if redeemed before five years.

• What “good” looks like: You understand the holding periods and any potential penalties.
• Common mistake: Redeeming bonds before the five-year mark without realizing the penalty.
• How to avoid: Familiarize yourself with the redemption rules on TreasuryDirect.gov.

10. Consider Tax Implications: Interest earned on savings bonds is subject to federal income tax, but exempt from state and local income tax.

• What “good” looks like: You are aware of the tax obligations and have a plan for them.
• Common mistake: Not planning for the tax liability on the interest earned.
• How to avoid: Consult a tax advisor, especially if the bond interest will be significant.

Common mistakes (and what happens if you ignore them)

Mistake	What it causes	Fix
Exceeding annual purchase limits	The purchase will be rejected; you’ll have to wait until the next calendar year.	Carefully check the current annual purchase limits on TreasuryDirect.gov before initiating a purchase.
Incorrectly entering the child’s SSN	Difficulty in registering or redeeming the bond; potential tax reporting issues.	Double-check the child’s Social Security number for accuracy before submitting any bond purchase.
Redeeming bonds too early	Forfeiting the last three months of interest if redeemed before five years.	Understand the redemption rules and hold bonds for at least five years to maximize earnings.
Not understanding Series I vs. Series EE	Potentially missing out on better returns depending on inflation and interest rates.	Research the characteristics of each bond type and choose based on your financial goals.
Forgetting TreasuryDirect account credentials	Inability to access, manage, or redeem your bonds.	Use a secure password manager and keep account recovery information up to date.
Ignoring tax implications	Unexpected tax bills or difficulty filing taxes for the child.	Consult a tax professional about the tax treatment of savings bond interest.
Gifting bonds with incorrect owner details	Complications during the redemption process for the child.	Ensure the child’s full legal name and SSN are entered precisely as they appear on official documents.
Not considering personal finances first	Financial strain or inability to meet immediate needs due to over-investment.	Prioritize your own emergency fund and debt repayment before investing in savings bonds.
Failing to designate a beneficiary	Bonds may go through probate if the owner dies without a beneficiary.	Consider adding a beneficiary to ensure a smoother transfer of the bond.

Decision rules (simple if/then)

• If you are concerned about inflation eroding the value of savings, then purchase Series I bonds because their interest rate adjusts with inflation.
• If you prefer a predictable, fixed rate of return, then purchase Series EE bonds because their rate is set at the time of purchase.
• If you want to gift bonds directly in the child’s name, then ensure they have a Social Security number and you have their accurate personal information.
• If you are gifting a significant amount and are unsure about tax rules, then consult a tax advisor because gift tax rules can be complex.
• If the child is very young and unlikely to need the money for at least 10-20 years, then savings bonds are a good option because they grow tax-deferred.
• If you need access to the funds within a year, then savings bonds are not a suitable investment because they cannot be redeemed until one year after issuance.
• If you are considering redeeming bonds before they mature, then be aware of the potential penalty if redeemed within five years because you will forfeit the last three months of interest.
• If you are purchasing bonds for multiple children, then track purchases separately for each child to avoid exceeding individual purchase limits.
• If you are buying bonds in your own name to gift later, then remember that the interest income will be reported on your tax return until the bond is gifted or redeemed.
• If you want to teach a child about investing, then consider gifting bonds in their name and involve them in tracking its growth and understanding its value.

FAQ

What are savings bonds?

Savings bonds are debt securities issued by the U.S. Department of the Treasury. They are considered a very safe investment, backed by the full faith and credit of the U.S. government.

Can I buy savings bonds as a gift for a child?

Yes, you can purchase savings bonds electronically through TreasuryDirect.gov and designate a child as the owner. You can also purchase them in your name and gift them to the child.

What are the different types of savings bonds?

The two main types available for purchase are Series EE bonds, which earn a fixed rate of interest, and Series I bonds, which earn a combination of a fixed rate and an inflation rate.

Are there limits to how much I can buy?

Yes, there are annual purchase limits for savings bonds. Check the TreasuryDirect.gov website for the most current limits for individual buyers.

When can the child redeem the savings bonds?

Savings bonds can be redeemed one year after the issue date. However, if redeemed within five years, you will forfeit the last three months of interest.

How is the interest taxed?

The interest earned on savings bonds is subject to federal income tax, but it is exempt from state and local income taxes. You can defer paying federal income tax until the bond is redeemed, matures, or reaches its final maturity date.

What happens if I buy bonds in my name and then gift them?

If you buy bonds in your name and gift them, the interest earned is reported on your tax return. You can gift the bond to the child, and they will then be responsible for the tax on future interest earned from the date of the gift.

Can I name a beneficiary on the savings bond?

Yes, you can name a beneficiary when purchasing the savings bond. This can help ensure the bond passes directly to the intended recipient upon the owner’s death, potentially avoiding probate.

What this page does NOT cover (and where to go next)

• Specific tax advice: Consult a qualified tax professional for personalized advice on gift tax and income tax implications.
• Investment strategies for high-net-worth individuals: If you have substantial assets, explore more complex investment vehicles.
• International gifting regulations: This guide is for U.S. citizens gifting to U.S. residents.
• Detailed bond maturity schedules: Understand the full lifespan of your bonds and when they stop earning interest.
• Using custodial accounts (UGMA/UTMA) for savings bonds: Explore how these accounts might interact with bond ownership.
• The process of redeeming savings bonds: Learn the specific steps and requirements for cashing in your bonds.