Savings Bonds as Gifts for My Children: How Should I Handle Them?

Both of my children have received a pair of savings bonds as Christmas gifts this year. While the gift is wonderful and very much appreciated, I am considering cashing them in and putting that money straight into their college 529 account. Let’s look at the pros and cons of the choices.

Why I Should Cash Them In

The cash value will almost assuredly be greater in the long run in a 529. As I discussed before with my own savings bonds, the amount of money one could make in another investment far exceeds the returns one could expect from a savings bond. By cashing the bond in now and moving the cash straight into my child’s 529, the return is likely to be much better than just sitting on the bond.

Since these bonds were given as a gift for the child’s future, it makes sense to maximize the return. Savings bonds are given to children with the intention of providing them with money later that, in theory, they’ll use responsibly. That’s the exact reason why I’m putting money into their 529 – to provide them with money that they’ll use responsibly in the future. Why not consolidate the money where it will get the best return?

Why I Shouldn’t Cash Them In

The gift was not a contribution to their 529. The gift that was given was a savings bond, not a contribution to a 529. A savings bond quite often is bought for different reasons – the money is being invested in the government, not into corporations, for example, and the bond money, when cashed, can be used for any purpose, not just education.

The bond offers a guaranteed rate of return – the 529 does not. Although the odds are good that the 529 would put more money in the child’s pockets in eighteen years than the savings bond would, the bond is the one that guarantees a rate of return. The other investment does not.

Cashing in the bond might be socially questionable. It’s the equivalent of taking a gift that’s just fine and exchanging it because it doesn’t match your tastes. For some, that’s completely appropriate – for others, it’s a questionable social move.

My Plan

In the past, I would have just shrugged my shoulders, stuck the savings bond in our safe, and not worried about it. This “solution” was mostly borne out of a fear of money management and also a fear of how to talk about money with others. Now, my solution would be somewhat different.

First, I would have a conversation with the gift giver about the reasons they gave the bond to the child. Did they want the child to use it for college? For something fun when they were older? Did they really not care that much – they just wanted to give a financially responsible gift? Maybe it was just a way to buy a government bond.

Based on that discussion, I might tell them about the 529 and (possibly) ask about whether they would want the bond to contribute to that. This is usually the best option if the gift was given without a purpose, or with just the purpose of paying for school – if there are other issues at play, I’ll usually just put the bond away. I usually explain how the 529 works, how I’m contributing to it, and answering any questions they might have.

Regardless, I won’t convert the bond and add it to the 529 without approval. Most of the time, honestly, the bond will likely remain as a savings bond. However, in the case of at least one of the bonds, I’m pretty sure I will be redeeming it and depositing it into their 529 account.

What it really comes down to is this: was the gift given to help a child with college? If that answer is yes and you’re able to have a healthy and mature conversation with the gift-giver, it might be worthwhile to see how they feel about it. Otherwise, don’t look a gift horse in the mouth – leave the bond as it is.

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