Savings bonds are generally considered a safe investment that could grow over time. And certain savings bonds offer high-interest rates during periods of high inflation, making them even more attractive to potential investors in 2022. You can either purchase savings bonds to diversify your own investment portfolio or give them to someone else. Because of the growth potential, savings bonds can make a lucrative gift for a child or teen. If you’d like to purchase savings bonds as a gift for a family member or friend, here’s what to know. You can also work with a financial advisor to get advice directly related to your portfolio or financial plan.
How Savings Bonds Work
Savings bonds are a debt instrument, which means when you buy them, you’re essentially lending the federal government money for up to 30 years. During that time, your savings bonds accrue interest. The amount of interest they’ll accrue depends on which type of bonds you purchase and other factors like inflation.
While you can hold savings bonds for up to 30 years, you can opt to cash them in after five years without losing any accrued interest. You can also do so sooner, though you’ll forfeit three months’ worth of interest payments. For instance, if you cash them in after two years, you’ll only receive 21 months’ worth of interest payments.
Types of Savings Bonds
The federal government currently offers two different types of savings bonds:
- Series I bonds: You can purchase electronic or paper Series I bonds. These bonds have two interest rates, a fixed rate and a composite rate that’s tied closely to inflation. The rates adjust every six months. During times of high inflation, composite rates typically increase. The current interest rate for Series I bonds is 9.62% and it’s set to adjust on October 31, 2022.
- Series EE bonds: You can only purchase electronic Series EE bonds. These bonds have a fixed rate and interest accrues on them each month. At the time of publication, the interest rate for Series EE bonds is 0.10% and it’s set to adjust on October 31, 2022.
How to Give Savings Bonds as a Gift
If you’d like to buy savings bonds to give as a gift, you can do so in two different ways, either by purchasing them electronically or with your tax refund. The easier option is likely to buy them electronically through the U.S. Treasury website. You can purchase up to $10,000 in Series I savings bonds and up to $10,000 in Series EE savings bonds each year.
Just keep in mind your recipient will need to set up a Treasury Direct account to receive the gift, though. Parents or guardians can create an account and establish a linked account for their child. Here’s the information you’ll need to provide when you purchase bonds online for someone else:
- Recipient’s Social Security number
- Recipient’s TreasuryDirect account number
- Recipient’s full name
You can also buy Series I paper savings bonds using your federal tax return. To do so, you’ll need to complete and file IRS form 8888. Paper savings bonds come in denominations of $50, $100, $200, $500 and $1,000. You can purchase up to $5,000 in Series I paper bonds each year, in addition to $10,000 in electronic bonds.
The recipient of the savings bond will need to pay taxes on any interest their bonds accrue each year, just as they would with interest earned from a regular savings account. However, if they use their savings bonds for qualified higher educational expenses, redeemed interest might not be taxable.
The Bottom Line
Savings bonds are considered a generally safe investment and you can buy them for yourself or a loved one. Purchasing them for a child or grandchild can be a good way to invest for their future, though bonds offer a relatively low yield compared with other types of investments. Still, the interest rate on Series I bonds is partially tied to inflation, making these an especially attractive investment during times of high inflation.
Tips for Investing
- Regardless of the type of investment, you’re wanting to make, it’s important to make sure that it aligns with your overall financial plan. A financial advisor can help you create a plan and even manage your investments for you. Finding the right financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- You may want to check out how each investment you make will impact your potential return, or how a specific asset might change your portfolio. Try SmartAsset’s free asset allocation calculator.
Photo credit: ©iStock.com/stockstudioX, ©iStock.com/jetcityimage, ©iStock.com/Charnchai