Updated on 12.24.07

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

Trent Hamm

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.

Loading Disqus Comments ...
Loading Facebook Comments ...
  1. MVP says:

    I’d cash it in and put it in another investment. There are far better ways to invest the money than keep it in the bond. And I probably wouldn’t put it in the 529, because then the kid never gets the money (I think) if they don’t go to college. It’s still their money, and not necessarily meant for educational purposes.

  2. Michelle Dawn says:

    I think you should leave the money where it is. It wasn’t intended as college money. The gift would be a nice bonus for a new high school graduate to spend toward a used car or graduation trip! Just my two cents.

  3. Leah Eggers says:

    My grandparents gave me a savings bond every year on my birthday till I turned 18. (I’m now 20.) My dad decided to leave them as bonds, and although he acknowledged they are my money, and I’m free to do what I wish with them, he strongly recommended that I leave them be and let them mature. In a year and a half when I graduate from college, I plan to cash in all the matured ones (about half) and use that as my “starter money” for the real world – deposit on a car, an apartment, furniture, etc.

    The gift was to them. Maybe you can hold on to it till they’re old enough to understand the options and then see what they’d like to do with it?

  4. Michael says:

    I’d cash it in, open them up a Roth IRA, and buy some index shares. Let them know about it when they’re old enough to understand investing, and use it as an educational tool.

  5. Tom says:

    Trent – If the intent of the giver is to fund your children’s college education (or other long-term goal), I don’t see a problem with cashing in the bond and dropping it into a 529 without asking permission. The giver may not understand 529s or the stock market, and therefore they might not be comfortable giving anything but savings bonds. Plus, savings bonds look cool as gifts, while a check or cash wouldn’t be as appreciated.

    Michael – great idea, though I don’t believe one can contribute to a Roth IRA until they have reportable earned income.

    Every time I give gifts to my 3- and 5-year old nephews, I usually include a check written to my brother, with the understanding the amount is to be deposited in their 529 plan. So far so good!

  6. vh says:

    Like Michael said! Start a Roth IRA for the kids. Then they’ll have something they can use for education or, if they prefer, for other purposes. My son used his for a down payment on his first house.

    Merry Christmas, Trent, Mrs. Trent, and Little Trents! :-)

  7. clint lawton says:

    I think that bonds are a great way to invest. I was given one that was a lot of years old and it was now worth a lot of money. I don’t think that I would have kept it if it was in cash.

    clint lawton

  8. I’m in the same boat… our kids regularly receive savings bonds as gifts. I’d love to have a Roth IRA for each of them, but my problem is this: we have nowhere no the minimum required for a new account with my preferred company –Vanguard ($3000) — and I haven’t come across a solid alternative with an extremely low or no mimimum investment. Anyone have any thoughts?

    Merry Christmas!

  9. Danielle says:

    Just a note on Roth IRA’s, You can’t open up a Roth IRA for your child until the child starts earning their own paycheck otherwise that would be a great idea. I plan on doing that for my children as soon as they start working. I would look @ the overall picture here in regards to diversity. If they have savings bonds then you could put more of their allocation in the 529 plan in more aggressive investments to balance out.

  10. JB says:

    Chris, the Vanguard STAR fund is the only Vanguard fund with a $1000 minimum investment. This could be a starting point.

    I’d go for the 529 if you know it will be a better investment in the end.

  11. Michele says:

    My kids both received bonds when they were born. They are now teenagers and I really never considered cashing them in until reading this. I would never ask the giver “why” they bought it… It’s a gift and I’ll give it to my kids later. (the amounts are small.. couple hundred bucks) I already know my son would put the $$ into junior CD or savings account. It will be a struggle to get my daughter to put any of it into savings.

  12. Bellen says:

    In trying to find a good way to give ‘money’ to our grandchildren I came across a site that stated a certain form had to be filed yearly with your taxes for any EE Bond or a big tax would have to be paid when it was redeemed. Do you know anything about this.

    In speaking to our broker, they suggested a custodial account if we did not want to gift to a 529.
    This is what we are going to do as the other grandparents are gifting to a 529. Gives the grandkids multiple sources of income when they can use it.

  13. Sandy says:

    My girls have gotten savings bonds every year for birthdays from the various relatives. They are still sitting in the envelopes they came in in our safe.
    While It’s quite likely that they could get a better rate of return in a 529, that is not necessarily a given. Think back just a few years, when investors (including those with 529s) lost bigtime. I remember hearing a call in radio show, and a caller lost nearly all the money he had been saving for his kids education in the 529 plan..made me think! So, if you would like to “spread the risk” that that won’t happen to you, tuck those savings bonds away as an insurance policy against such an untimely crash in the market.
    Plus, if they want to use the money for another reason (starting their own company, for example) it will be there for them…it is, after all, their money.
    Once my oldest daughter’s savings account grew to $1000 of , while earned, she did not file a W2, and so was ineligible for the Roth IRA. We ended up opening up a CD instead. When she does have a job that she’ll pay taxes on, I’m thinking of having her split the amount she makes on saving for college and a Roth. But, again, she may want to save for something else, too…it will be HER money.

  14. wealthy_1 says:

    Perhaps the savings bonds were given just as a gift. Maybe the gift giver wasn’t thinking of investing in the children’s college education. Maybe they were just thinking the savings bonds would be money they would have in the future for whatever they wanted to use it for.

    Next year if you would rather have a donation into the children’s college fund, you should graciously let people know that in advance.

  15. Heidi says:

    I would leave the bonds alone, unless the giver expressed a desire that the money should go into your children’s 529s. By cashing them in you are saying to the giver that savings bonds are a bad investment and that you are more financially sophisticated than they. Even if you believe exactly that – the social implications that you laid out above is reason enough to let them be.

    Besides, savings bonds proceeds can be used for anything. What if your child decides to spend a year traveling in Europe or building homes in Africa before college? Cashing in those savings bonds can help make those kind of dreams happen.

  16. Ryan S. says:

    What type of bond is it? IIRC, I series bonds have some educational advantages, but I can’t remember what they are at the moment (that could make a nice blog post later :)


  17. Robin says:

    I heard Dave Ramsey talk about this. His grandmother gave his kids savings bonds every year, with the intent of them being used for college. He immediately cashed them and put them in their 529’s. When she asks how they’re doing, he tells her they’re doing great…

    As an almost-graduated college student, I would much rather have had a 529 than a few savings bonds. Yeah, they were nice, but when I think about how much more money they would have been if they had been in a 529, it makes me sick. At least the older ones… the risk is very very low if you’re in the market for at least 5 years and you’re in mutual funds.

  18. elizabeth says:

    My husband and I gave my brother a savings bond this year. I know he has some from my grandparents. He is in high school, doesn’t have a 529 and has almost no savings. Everytime we give him any money, he buys stuff. We asked my parents to put it with his other savings bonds, but we also cosigned my husband so that no one else gets the bright idea to cash it in. They all need money, and we don’t want it taken. We will help him cash it out in 3 years (long before it matures) to help with college. At least then he will have something. Our only other option is to invest extra in our own portfolio and give him a large check at graduation. Which is likely part of what will happen in the future. I will add up the gifts (we are matching his savings bonds, but not telling him) and then take our average interest over the 3 years and add that to the amount. It will only be a couple hundred dollars, but I know he will need it to get started.

  19. Macinac says:

    I believe it is the parent’s responsibility to make the best choice. If, for example, someone gave your nine year old a shotgun, you might decide to lock it away for a while. If someone gave your boy a girl’s bike, you might want to exchange it for a boy’s bike.

  20. Johanna says:

    My parents only recently turned my collection of savings bonds over to me. (I’m 30 years old – I was fortunate not to have needed the money for college, or for anything specific since then.) There’s more than $3000 worth, and while I can remember receiving some of them ($500 I won in a math contest in eighth grade), I’ll be damned if I can remember where most of them came from. I know my relatives gave me some of them when I was a kid, but since they weren’t something I could use or play with right away, they didn’t make much of an impression on me.

    My advice: If you decide to hang onto the bonds, stick a note on each one listing who gave it and why. Better yet, have the giver write a short note to go with the bond, and hang onto both of them. That way, when it comes time for your children to use the money, they can reflect on all the caring people who have been generous with them over the years.

  21. Michael says:

    Sorry to hear that you can’t purchase a Roth IRA until the kids start earning money. BUT…
    I still think saving bonds are an unfortunate gift. I was recently given some savings bonds that my father had bought for me in 1975. $300 worth, but I cashed them in for just over $900. Had that same $300 been in an S&P index fund (had such things been available then), it would have been worth over $5000.

  22. Daria says:

    You could keep them, but just reallocate the 529 to account for them. In other words, an allocation has a small percentage of bonds. So consider the fact that those are held outside the 529 and allocate within the 529 with stock funds only.

  23. Jeff Frese says:

    I started a company that lets anybody in your circle of friends and family gift directly into your child’s 529 plan. So instead of another Barbie Doll or shirt from the Gap people can gift into your child’s plan. It’s a simple site and concept that helps people save for college and give meaningful gifts. The site is http://www.freshmanfund.com

    I also write a blog on saving for college the site is http://www.giftingforcollege.com

  24. Sally says:

    Seriously – you would ask them? Are we talking big $$ here? I have a few for $50 and $100 – they are getting cashed – and in this case some in his savings. We will start Roth IRAs for the kids when they are 18 which isn’t too far away.

    Bottom line – a GIFT is a GIFT. Once it is given – you do what YOU want with it.

  25. emily says:

    im 14 and im cashing mine in so let them wait untill my age, and ask them!!!

Leave a Reply

Your email address will not be published. Required fields are marked *