Dear Dr. Don, Would it be possible to accrue the interest on Series EE U.S. savings bonds and an amount originally invested in some other savings vehicle for a 4-year-old child for whom I have been saving since birth? I ask because I think the bonds are no longer being sold, and I would like to continue gifting to the child.
Thanks, -- Audrey Accruals
Dear Audrey, Interest accrues; that's what it does, until an investment stops paying interest. It's not quite clear what's going on in the other savings vehicle of yours, but savings bonds accrue interest for 30 years.
Savings bonds are still being sold; they're just not being sold in paper (physical) form, with the exception that you can buy Series I savings bonds with your federal income tax refund and receive them on paper.
You can still buy savings bonds for the child in electronic form as a gift after establishing your own account at TreasuryDirect.gov, the government's website for buying and redeeming bonds. Five days after the purchase is made in your account, you can transfer a savings bond to a minor account established for the child. TreasuryDirect also has gift certificates that you can print out to announce the gift of a savings bond.
The child's parent or guardian also will need to have a TreasuryDirect account and then establish a minor account for the child that would be linked to the parent's or guardian's TreasuryDirect Primary account.
The question becomes, should the bonds be held in the child's name or in the name of the parent? Parents who own savings bonds that qualify for the education tax exclusion and then later cash in those bonds to pay for qualified education expenses don't have to pay income taxes on the interest earnings. Alternatively, the parents could keep the savings bonds in the child's name, and the child could report the interest income each year, paying any income taxes due in the year the interest was earned.
It all sounds complicated, but it's not too bad, provided the child's parents are willing to set up the accounts. Don't worry about the parents having control over the disposition of the electronic savings bonds until the child reaches age 18, because that's the case with paper savings bonds, too. I like the Series I savings bonds better for the long haul, but Series EE bonds are guaranteed to double in value after 20 years, and that's approximately a 3.5% annual return.
Figure out where you have that other money invested, and decide if you can improve on that investment. A Section 529 college savings account or prepaid tuition plan might be just the ticket.