Series EE savings bonds have a long tradition as a gift for children from parents and from grandparents. Savings bonds provide an investment that a child can even own in his own name. Starting in 2012, the U.S. Treasury stopped selling paper bonds, so the gifts must be in the form of electronic EE savings bonds.
Grandparents can purchase EE Savings Bonds to help supplement their grandchild's education.
Exploring EE Bond Features
The electronic version of EE savings bonds can be purchased in any amount from $25 to $10,000. An EE bond earns a fixed rate of interest for the life of the bond with a guarantee to at least double in value in 20 years.
Savings bonds earn interest monthly that compounds semi-annually. The U.S. Treasury sets the rate for new bonds twice a year, on May 1 and November 1. Savings bonds earn and compound interest for up to 30 years, making them an appropriate choice for long-term education savings.
The Basics of TreasuryDirect Accounts
Savings bonds are purchased through an account set up on the TreasuryDirect.gov website. For grandparents to purchase bonds for minor grandchildren, the grandparents must establish an account, and the gift bonds can be transferred to accounts in the grandchildren's names, linked to accounts in the name or names of the grandchildren's parents.
To make the gift to grandchildren work out, both the grandparents and parents must have TreasuryDirect accounts. An account is set up online and linked to a bank account for the transfer of money.
Buying Gift Savings Bonds
To purchase EE bonds as gifts in a TreasuryDirect account, you select the type of bond – in this case EE bonds – and designate a recipient for the bond. You will need the grandchild's name and Social Security number. Select the option to note that the bond is a gift. Type in the amount of the bond and complete the purchase transaction.
The bond will go into an electronic "Gift Box" attached to your TreasuryDirect account. From the gift box you provide the TreasuryDirect account number of the person receiving the bond, and the bond will be delivered to the account of the recipient, such as a grandchild.
Identifying Education Tax Exclusions
Savings bond interest grows tax-deferred until a bond is cashed, then taxes are due. Bond interest may be tax-free if the money from redeemed bonds is used to pay higher education costs. To qualify for the education exclusion, the bonds must be registered in the name of the taxpayer that is paying for the grandchild's college tuition.
If the savings bonds are purchased for a grandchild to pay for their college education, but the bond is placed in the child's name, the child will have to pay taxes on the bond when it is cashed. The child could then use the remaining funds toward their education expenses.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.