You can buy savings bonds for your grandchildren through TreasuryDirect.gov and watch their money grow tax-free until they need it. The federal government issues these bonds and promises to pay you back with interest. Over 60 million Americans own savings bonds, and they remain one of the safest ways to save for a child’s future because the U.S. government backs them. Your grandchild gets money that grows year after year without you having to do anything but wait. This article walks you through everything you need to know to open an account, buy bonds, set them up for the right people, and understand the tax rules that apply.
📌 What You’ll Learn:
- 🏛️ Why savings bonds work differently than bank accounts and how the government backs your money
- 💰 The exact steps to buy bonds online and the different types you can choose from
- 👶 How to set up bonds so your grandchild becomes the owner and what happens when they turn 18
- 🚫 The biggest mistakes grandparents make and how to avoid losing money or paying extra taxes
- 📊 Real-life examples showing how much your bonds grow and when you can cash them in
Your Money Locked In: Why Savings Bonds Work Like a Deal
When you buy a savings bond, you make a deal with the U.S. government. You give them money today, and they promise to give you back more money later. The government uses your money to run the country, and they pay you interest for letting them borrow it. Think of it like this: You loan your neighbor $100, and they agree to give you back $110 in five years. That extra $10 is your payment for waiting.
Savings bonds come in two main types: Series EE and Series I. Series EE bonds pay a fixed interest rate that stays the same for 30 years. Series I bonds protect you from inflation by changing their interest rate twice a year. Inflation means when prices go up, your money buys less stuff than before. An I bond’s rate adjusts to make sure you keep the same buying power over time.
The federal government creates these bonds through the U.S. Department of Treasury. This is the same department that prints money and manages the country’s finances. When you own a savings bond, you own a piece of a promise from the strongest borrower in the world. The U.S. government has never failed to pay back its bonds, so these are the safest investments you can make.
Your money grows every single month, even when you sleep. With Series EE bonds, you know exactly how much interest you earn each month. With Series I bonds, the interest rate changes, so you get updates every May and November. Neither type has any risk of losing your money. The worst that happens is you might earn less interest than you expected, but you never lose what you put in.
The Two Types: EE Versus I Bonds and When to Pick Each One
Series EE Bonds guarantee you will double your money in 20 years. If you buy a $100 EE bond, you will have $200 after 20 years, no matter what happens. This makes EE bonds easy to understand and plan for. The interest rate is locked in when you buy the bond and never changes. You know exactly what your money will be worth five years from now, ten years from now, or any time in the future.
Series I Bonds fight inflation like a shield. When prices rise at the grocery store or gas pump, your I bond’s interest rate rises too. If inflation falls, your rate might fall, but it will never go below 0%. This means your money always keeps its buying power. You can buy what you bought last year for the same number of I bond dollars you earned. In high inflation times, I bonds often pay more than EE bonds.
The interest rates change every six months for I bonds. The Treasury updates rates in May and November based on inflation numbers from the government. When you buy an I bond, it keeps the rate you bought it at for the first six months. After that, it switches to the new rate every May and November. Your rate will be different from someone else who bought their I bond at a different time.
Series EE bonds cost exactly half of their face value. A $100 EE bond costs you $50 to buy. A $1,000 EE bond costs $500. The bond grows to its full value over time. Series I bonds cost full price: a $100 I bond costs $100 to buy. You do not get a discount on the front end, but the interest rate protects you from inflation.
Neither bond pays interest before you cash them in. With a regular savings account, you get interest every month or quarter. With savings bonds, all the interest stays inside the bond and grows. You only see that interest when you cash the bond or when you open a statement. This is called accruing interest, and it means your money is working for you even though you do not see it.
Digital Bonds Only: Why You Buy Them Online, Not in Person
You cannot buy new savings bonds at your bank anymore. The government stopped selling paper bonds to regular people in 2011. Today, the only way to buy new bonds for your grandchild is through TreasuryDirect, which is the official government website. You need a computer or phone with internet access and a bank account to set up. The process takes about 15 minutes and you can buy bonds at any time of day.
You will need a Social Security number or tax identification number to open a TreasuryDirect account. Your grandchild needs one too if you are setting up bonds in their name. If your grandchild does not have a Social Security number yet, you can get one at your local Social Security office or online. The process usually takes two to four weeks. Once you have both numbers, you are ready to open the account and buy bonds.
Your bank account must be for direct deposit. This means the bank can pull money out of your account and put money into it electronically. Almost all bank accounts work this way today. When you cash in a bond, the government puts the money directly into your bank account instead of sending you a check. You will need your bank’s routing number and your account number to set up TreasuryDirect.
TreasuryDirect charges no fees for buying, selling, or owning bonds. The government does not make you pay for the account or for transactions. You never pay a middleman like a broker or financial advisor. All the money you invest goes into bonds, and you keep all the interest you earn. This is one of the biggest advantages over buying bonds through a bank or investment company.
You must own your TreasuryDirect account for at least 30 days before you can cash in a bond. This waiting period prevents people from buying and selling bonds too quickly just to chase interest rates. Once the 30 days pass, you can cash in bonds whenever you want. Most bonds are cashed in within minutes, though it might take a few days for the money to show up in your bank account.
Building the Ownership: Whose Name Goes On the Bond
This decision matters more than most people think. When you buy a bond, you choose whether you or your grandchild is the owner. The owner controls the bond and decides when to cash it in. This is the most important choice you will make about your bond. If you put your name on it, you can change your mind and cash it in whenever you want. If you put your grandchild’s name on it, they will control the bond when they turn 18.
When you set up a TreasuryDirect account, you decide whose name goes on the account. The account name belongs to whoever will own the bonds. You can have an account in your own name, in your grandchild’s name, or as a custodian account. A custodian is an adult who manages money for a young person until they turn 18. Most grandparents set up custodian accounts so they keep control until their grandchild is old enough to handle the money.
A custodian account has two names on it: yours and your grandchild’s. You are listed as the custodian, and your grandchild is listed as the minor. The bonds are legally your grandchild’s property, but you make all the decisions until they turn 18. You decide when to buy more bonds, when to cash them in, and what to do with the money. Your grandchild cannot override your choices while they are under 18.
When your grandchild turns 18, they become the owner of the account. You lose the right to make decisions. Your grandchild can cash in every bond if they want to. They can move the account to their own TreasuryDirect account. They can keep the bonds growing for 30 more years if they choose. Most parents and grandparents talk to their kids before their 18th birthday about what will happen to these bonds.
You can also open an account in your own name only and buy bonds with your own money. These bonds belong to you, not your grandchild. You can gift the bonds to your grandchild later, but while you own them, they are your property. This choice gives you the most control but requires you to give the bonds away yourself. The bonds do not automatically become your grandchild’s when you die unless you write that in your will.
The key difference between these options comes down to control. If you want complete control until your death, use your own name. If you want your grandchild to take control at age 18, set up a custodian account. If you want your grandchild to get the bonds when you die but not before, you can own them yourself and name your grandchild in your will. Each choice has different tax consequences, which we cover later in this article.
The Federal Framework: Rules About Who Buys, Who Owns, and What Happens
The U.S. government created a set of rules for savings bonds written in the 26 U.S. Code Section 135. This law spells out how bonds work and what happens when you use them for education. The law says you can buy bonds for anyone, but tax breaks only apply if certain people own them. The owner must be at least 24 years old when they buy the bond to get tax-free education benefits later. This sounds strange, but the government designed it this way to prevent young people from buying bonds and claiming they used the money for school.
If your grandchild is the owner and they are under 24 when they buy the bond themselves, they cannot use the education exemption. This rule is why most grandparents buy bonds in their own name and then gift them to their grandchild. The 24-year-old rule applies to whoever bought the bond, not whoever owns it. If you buy the bond at age 55 and gift it to your 10-year-old grandchild, you can use the education exemption because you were 24 or older when you bought it.
The federal government sets the interest rates for both types of bonds. The Treasury Secretary announces rates every May and November. These rates apply to all bonds of that type bought during that period. If you buy an I bond in January, you get the rate announced in November for the first six months. If you buy an I bond in August, you get the rate announced in May for the first six months. The rate you get depends on when you buy, not when the rate is announced.
Federal law also limits how much you can buy each year. You can buy up to $10,000 in EE bonds per person per year through TreasuryDirect. You can buy up to $10,000 in I bonds per person per year the same way. If you are married, your spouse can buy another $10,000 of each type. You can give your spouse $10,000 and they can use it to buy their own bonds, so a couple can invest $40,000 per year total. Once you reach $10,000 in one bond type for the year, you must wait until next year to buy more.
If you buy bonds in your own name and want to gift them to your grandchild, federal gift tax laws apply. The federal gift tax is discussed in 26 U.S. Code Section 2501. You can give away up to $18,000 per year per person without paying any gift tax or filing paperwork. This means you can gift a $10,000 bond to each of two grandchildren every year without any tax trouble. If you gift more than $18,000 to one person in a year, you must file a gift tax return. The extra amount counts against your lifetime gift tax limit of $13.61 million.
The federal government also has rules about when bonds mature. All savings bonds issued today mature after 30 years. After 30 years, the bond stops earning interest. If you do not cash it in, it becomes worthless on paper, but you can still cash it in for what it is worth. Some very old bonds from before 1974 have already matured, and people can no longer cash them in. The oldest bonds you can still cash in are the ones issued in 1995 or later.
State Laws: How Your Grandchild’s Home State Affects the Rules
Each state has different laws about how minors can own property and what rights custodians have. Most states follow the Uniform Transfers to Minors Act (UTMA), which sets up how custodian accounts work. UTMA says the minor takes control of the account at age 18 in most states, but a few states set the age at 21. Check your state’s rules if your grandchild lives in a state other than where you live. Your grandchild’s home state is what matters because that is where they will be living and may use the money.
Some states have their own rules about gifts and inheritance that affect savings bonds. If you live in a community property state like California, Texas, or Arizona, you may need to tell your spouse about the bonds you are buying. In these states, property earned during marriage can belong to both spouses automatically. If you buy a bond with money earned during your marriage and you die, your spouse might have claims to part of it. This is why married couples often buy bonds in both their names or use their own money clearly.
State income tax rules affect bonds too. Most states do not tax the interest you earn on savings bonds until you cash them in. A few states tax the interest each year even though you do not receive the money yet. Check with your state’s tax authority or a tax professional if your state has this rule. When your grandchild cashes in the bond, they will owe both federal and state income tax on the interest, unless they use the education exemption.
Your grandchild’s state of residence also affects education tax benefits. If your state and your grandchild’s state are different, you must follow your grandchild’s state’s rules for what counts as a qualified education expense. Most states accept the same expenses as the federal government, but some states are stricter. A qualified expense includes tuition, fees, and room and board at a college, university, or trade school. Check your grandchild’s state’s rules if you plan to use the bond for education benefits later.
States also regulate whether a parent or grandparent can set up a custodian account without the other parent’s permission. If both parents are alive, many states require both to agree if you are buying bonds for a minor. If the parents are divorced or unmarried, only the custodian parent can set up the account. If you are the grandparent, you can set up a custodian account in most states without either parent’s permission. The laws vary by state, so ask a lawyer in your state if you are unsure about your rights.
The Account Setup: Building Your TreasuryDirect Profile From Zero
Open TreasuryDirect by going to www.treasurydirect.gov and clicking “Open Account.” You will need your Social Security number, an email address, a login password, and a phone number. The website will ask you security questions that only you should know the answers to. Create a password that has at least 16 characters with uppercase letters, lowercase letters, numbers, and symbols. Write this password down and keep it in a safe place, because you will need it to buy or cash in bonds.
Next, you will create a Linked Account. This is the bank account that money flows to and from. Your bank must support ACH transfers, which are electronic payments between banks. Most banks support ACH, but some small banks do not. If your bank does not support ACH, you will need to change banks or use a different account. You will need your bank’s routing number and your account number to set this up.
The website will verify your bank account by making two tiny deposits within one to three business days. When these deposits show up in your bank account, the website will ask you for the amounts. You type in the exact amounts, usually something like 23 cents and 47 cents. This proves you have access to that bank account and that the account is really yours. Once you verify the account, you can start buying bonds.
If you are setting up a custodian account for your grandchild, you will need their Social Security number. You will provide your name and their name. TreasuryDirect will ask you to choose “UGMA/UTMA account” during setup. You are the custodian, and your grandchild is the minor. The account will grow for your grandchild, and they will take control when they turn 18 unless the law in your state sets a different age.
You can also make your grandchild the registered owner from the start. This is different from a custodian account because you are not the custodian. Your grandchild owns the bonds as soon as you buy them. You cannot access the account if you are registered only as a parent or grandparent. The owner must be at least 18 years old to have an account in their name. If your grandchild is under 18, you cannot use this option.
After you set up the account and verify your bank account, you are ready to buy your first bond. Click “BUY” on the website. You will choose either Series EE or Series I. You will pick how much to buy. You can buy in amounts of $25, $50, $75, $100, or more up to your yearly limit. The website will show you what interest rate you will earn before you confirm the purchase. You review everything one more time, and then click “confirm” to make the purchase final.
The bond shows up in your account immediately, though your bank account may not get charged until the next business day. You will receive a confirmation email with all the details. You can log back in anytime to see your bonds, check their current value, and plan your next purchase. You can view a statement that shows every bond you own, when you bought it, what you paid for it, and what it is worth today.
The Real Worlds: Three Common Scenarios and How They Play Out
Scenario 1: The Grandparent Who Wants Control
Margaret is 62 years old and wants to buy bonds for her grandchild Lucas, who is 10. Margaret wants to control the bonds until Lucas turns 18. She opens a TreasuryDirect account and selects “UGMA/UTMA account” during setup. She lists herself as custodian and Lucas as the minor. Margaret buys $500 of Series EE bonds. She plans to buy $500 every year for the next eight years so Lucas will have $4,000 by his 18th birthday.
| What Margaret Does | What Happens Next |
|---|---|
| Opens a custodian account in Lucas’s name | Lucas owns the bonds but Margaret controls them |
| Buys $500 per year for 8 years | Margaret invests $4,000 total from her own money |
| Lucas turns 18 | Lucas becomes the account owner; Margaret loses all control |
| Lucas decides what to do with the bonds | He can cash them in, keep them growing, or move them to his own account |
When Lucas turns 18, Margaret’s role ends. The bonds are legally Lucas’s property. Margaret has no say in what Lucas does with the money. Lucas might cash them in and spend the money on a car. He might keep the bonds growing until he is 30. He might withdraw the money to pay for college. Margaret cannot force him to use it for any particular purpose. The only way to maintain control is for Margaret to keep the bonds in her own account and gift them to Lucas in her will, but then she cannot access the money if she needs it for herself.
Scenario 2: The Grandparent Who Wants a Guaranteed Gift
David is 58 and wealthy. He buys $100,000 in Series I bonds in his own name. He plans to gift these bonds to his two grandchildren: $50,000 to each one. David writes in his will that these bonds go to his grandchildren when he dies. David wants to use the education exemption when the bonds are redeemed for college, so he made sure to buy them when he was over 24.
| What David Does | What Happens Next |
|---|---|
| Buys $100,000 I bonds in his own name | The bonds are David’s property; his grandchildren do not own them yet |
| Writes the bonds into his will | The bonds will transfer to his grandchildren when David dies |
| Pays federal gift tax on amounts over $18,000 per year | Gift tax is owed if David gifts more than $18,000 per grandchild per year while alive |
| Grandchildren receive bonds through inheritance | Grandchildren inherit the bonds with a stepped-up basis and pay no capital gains tax |
When David dies, the bonds transfer to his grandchildren through his will. They inherit the bonds at their current value, and the stepping up in basis means they owe no capital gains tax on the growth that happened while David owned them. This is a major tax advantage. If David had gifted the bonds while alive instead of through his will, his grandchildren would owe income tax on all the interest earned while David owned them. The inheritance route is cleaner for tax purposes.
Scenario 3: The Grandparent Who Wants Tax-Free Education Benefits
Jennifer is 55 and a teacher. She buys $10,000 in Series EE bonds in her own name. She plans to give these bonds to her grandchild Sarah when Sarah turns 18. Jennifer will pay for Sarah’s college tuition with the bond money, and she wants to use the education exemption to avoid paying taxes on the interest. Jennifer already has three other grandchildren and buys bonds for all of them, so she is hitting her $10,000 yearly limit for EE bonds.
| What Jennifer Does | What Happens Next |
|---|---|
| Buys $10,000 EE bonds at age 55 | Qualifies for education exemption because she was over 24 when buying |
| Gifts bonds to Sarah when she turns 18 | Sarah owns the bonds; Jennifer gives up all rights to them |
| Sarah uses the money for college tuition | Sarah redeems bonds and uses money for qualified education expenses |
| Sarah claims the education exemption on her taxes | The interest is tax-free; only the principal is taxed at Sarah’s tax rate |
When Sarah redeems the bonds for college tuition, the interest earned is completely tax-free. If the EE bonds grew from $5,000 to $7,000, Sarah only pays tax on the $5,000 she originally put in. The $2,000 in interest is not taxed at all. This is a huge savings for Sarah’s family. If Jennifer had not used her own name as the buyer, Sarah would not qualify for this benefit. The education exemption is tied to whoever bought the bond, not who currently owns it or who redeems it.
How the Money Grows: Interest, Compounding, and Real Numbers
Series EE bonds are guaranteed to double in 20 years. If you buy a $100 EE bond today, it will be worth $200 in 20 years. This works out to an interest rate of about 3.5% per year. The Treasury guarantees this on every EE bond. The interest compounds monthly, meaning your interest earns interest every single month. After one year, your $100 bond is worth about $103.50. After two years, it is worth about $107.12 because the extra $3.50 earned interest too.
Here is a real example with actual numbers. You buy $5,000 in Series EE bonds today at age 50. Your grandchild is 5 years old. You want her to have this money for college at age 18. In 13 years, those bonds will be worth approximately $7,500 if they grow at the guaranteed rate. Your grandchild now has $7,500 instead of $5,000. You earned $2,500 in free money just by waiting. Your grandchild can use this money for college without taking out student loans.
Series I bonds work differently because their rate changes. Currently, I bonds earn about 4.90% per year. That rate lasts for six months, then a new rate takes effect in May. If you buy an I bond today for $10,000, in six months it will be worth approximately $10,245. In one year, it will be worth about $10,500. In five years, it could be worth $12,600 if rates stay the same, but rates will definitely change.
Here is a real example with I bonds. You buy $10,000 in I bonds for your grandchild at age 7. Over the next 11 years until college starts at age 18, the bond earns interest at different rates. Some years rates are 1%, some years 5%, some years 3%. On average, let us say it earns 3.5% per year. In 11 years, your $10,000 becomes approximately $14,200. You earned $4,200 in free money, and your grandchild did not have to work for it.
The longer you keep the bonds, the more they grow. Most people keep Series EE bonds for at least 20 years to reach the doubling guarantee. Some people keep them for 30 years because the interest keeps growing past 30 years too. If you buy an EE bond and hold it for 30 years, it will be worth more than double. Each year after it doubles, it keeps earning interest at the guaranteed rate. A $5,000 EE bond held for 30 years becomes approximately $13,000.
You do not have to wait the full time to cash in a bond. You can cash in a Series EE bond after one year. If you cash it in before five years, you lose three months of interest as a penalty. After five years, you can cash in anytime with no penalty. Series I bonds must be held for one year before you can cash them in. If you cash in an I bond before five years, you lose three months of interest. After five years, you can cash in anytime with no penalty.
The Tax Trap: When Bonds Trigger Tax Bills and How to Avoid It
When you cash in a bond, you owe federal income tax on all the interest you earned. If you bought a $5,000 EE bond and it grew to $7,500, you owe tax on the $2,500 in interest. The interest is taxed as ordinary income at your tax rate. If you are in the 22% tax bracket, you owe $550 in tax on that $2,500 interest. This is the biggest cost most people do not think about when they first buy bonds.
State income tax also applies to bond interest in most states. If your state has income tax, your state will tax the bond interest too. Some states have no income tax, like Texas, Florida, and Wyoming. If you live in one of these states, you only owe federal tax. If you live in a state with income tax, you owe both federal and state tax. A person in California with 9.3% state tax plus 22% federal tax owes 31.3% total tax on their bond interest.
The education exemption stops this tax bill for qualified expenses. If you use bond money to pay college tuition, the interest becomes tax-free. This only works if the qualifying conditions are met. You must be at least 24 years old when you buy the bond. You must use the money for tuition, fees, or room and board at an eligible school. You cannot use bond money for books, supplies, or student loans. If you meet all the conditions, all the interest is completely tax-free, and the principal is still taxed at your tax rate.
Your grandchild’s income tax bracket is usually much lower than yours. If you own the bonds and cash them in, you pay tax at your rate. If your grandchild owns the bonds and cashes them in, they might be a student with little income, and they pay tax at a lower rate. This is why some grandparents put bonds in their grandchild’s name even though they cannot access the money. A $2,500 interest tax might be $550 at the grandparent’s 22% rate but only $200 at the grandchild’s 8% rate as a student.
There is a kiddie tax rule that catches some grandparents by surprise. If your grandchild is under 18 and has unearned income over $1,250, the extra income is taxed at your rate instead of their rate. This rule is designed to prevent parents from shifting investment income to their kids to avoid taxes. If you buy bonds for your grandchild and your grandchild has other investment income, all the interest might be taxed at your higher rate. The kiddie tax rule only applies if the child is under 18 or a full-time student under 24.
The easiest way to avoid surprise tax bills is to understand when you will cash in the bonds before you buy them. If you plan to use the money for college, buy the bonds yourself and plan to use the education exemption. If you plan to gift the bonds to your grandchild, put them in your grandchild’s name as a custodian account so your grandchild pays the tax when they cash it in. If you buy bonds for yourself and plan to gift them in your will, the interest is taxed to you when you cash them in, or your estate handles the tax if you pass away before cashing them in.
When to Access Your Money: Penalties, Waiting Periods, and Fees
You must hold any savings bond for at least one year before you can cash it in. If you try to cash in a bond before one year, the government will refuse. This is a hard rule with no exceptions. You cannot get an emergency exception to cash in a bond at six months. After one year, you can cash in whenever you want. This rule stops people from buying bonds and immediately cashing them in to make a quick profit.
If you cash in a Series EE or Series I bond before five years, you lose three months of interest as a penalty. This penalty is automatic and applies to every bond. If you owned a bond for three years and it earned $100 in interest, you get back $100 minus three months of interest. If that bond was earning about $25 per month in interest, you lose $75, and you get back $25. This penalty is designed to stop people from using bonds as a short-term savings account.
After five years, you can cash in any bond anytime with no penalty. You receive all the interest you earned plus your principal. There is no fee for cashing in. You do not pay a commission to anyone. The government just puts the money in your bank account. If you wait exactly five years and one day to cash in the bond, you get every penny of interest with no penalty.
If you own a bond for 30 years, it stops earning interest. You can still cash it in, but the interest stops growing. The bond is considered “matured” after 30 years. If you hold it longer than 30 years, it does not start earning negative interest or anything strange. It just stops growing. After 30 years, there is no point in holding it anymore because the money is not growing. You might as well cash it in and put the money somewhere else.
Very old bonds from before 1974 can no longer be cashed in. These bonds have passed their final maturity date, which is called the “extended maturity period.” If you have old paper bonds from your parents or grandparents, check if they were issued before 1974. If they were, you cannot cash them in at the Treasury. You might be able to sell them through a specialized broker, but you will not get the full face value. The best advice is to cash in all bonds before they reach 30 years.
You cannot cash in bonds partially. You must cash in the entire bond. You cannot cash in half of a $10,000 bond and keep the other half growing. The entire bond must be cashed in as one transaction. If you want to cash in some of your bonds but not others, you must cash in complete individual bonds. If you bought $5,000 in five different $1,000 bonds, you can cash in three of them and keep two growing. But you cannot cash in $2,500 and keep $2,500 growing from the same bond.
Mistakes That Cost Money and How to Avoid Them
Mistake 1: Buying Bonds in Your Name and Forgetting to Gift Them
Many grandparents buy bonds in their own name with the intention to gift them later. Then they never actually transfer the bonds or write them into their will. The grandchild never receives the bonds. When the grandparent dies, the bonds go through probate and might end up going to someone else. The grandchild loses out on thousands of dollars. To avoid this, set up a custodian account for your grandchild from the start, or write the bonds clearly into your will while you are alive and tell your family about it.
| Problem | Solution |
|---|---|
| Bonds stay in grandparent’s name after death | Set up custodian account or update will immediately after buying |
| Grandchild never receives intended gift | Talk to family about the bonds and your wishes |
| Bonds go through probate court | Name grandchild in will or use custodian account to avoid probate |
Mistake 2: Cashing in Before Five Years and Losing Interest
You cash in a bond after three years because you need money for a car. You lose three months of interest as a penalty. You could have waited two more years and avoided this penalty. If your bond earned $1,200 in three years, you lose $300. You get back $900 instead of $1,200. To avoid this, calculate when you will need the money before you buy the bond. Only buy bonds with money you will not need for at least five years. If you need access to money sooner, use a regular savings account instead.
| Problem | Solution |
|---|---|
| Cashing in before 5 years loses 3 months interest | Wait until year 5 before cashing in if possible |
| Unexpected emergency requires the money | Keep separate emergency savings for unexpected needs |
| Money tied up when needed | Only invest money you truly will not need for 5+ years |
Mistake 3: Missing the $10,000 Annual Limit
You try to buy $15,000 in EE bonds in January because you want to give a big gift to your grandchild. The government stops your purchase and will only let you buy $10,000. You have to wait until next year to buy the other $5,000. To avoid this, keep track of how much you bought each year. If you are married, remember that you and your spouse each have your own $10,000 limit per bond type. You can buy $10,000 EE and $10,000 I bonds each, and your spouse can buy another $10,000 each for $40,000 total per couple per year.
| Problem | Solution |
|---|---|
| Trying to buy more than $10,000 per year | Track purchases against the yearly limit |
| Cannot buy more until next calendar year | Plan large purchases across multiple people or bond types |
| Limits reset on January 1st | Buy in December if you want to start a new year’s purchases |
Mistake 4: Not Understanding the Education Exemption Rules
You buy a bond when you are 22 years old for your grandchild’s college. When your grandchild redeems the bond for college tuition, the tax does not go away. You do not qualify for the education exemption because you were not 24 years old when you bought the bond. You could have had a parent or older relative buy the bond instead and qualified for the exemption. To avoid this, make sure whoever buys the bond is at least 24 years old if you plan to use the education exemption later. Check the IRS rules before buying the bond to confirm you qualify.
| Problem | Solution |
|---|---|
| Buyer was under 24 when purchased | Have someone age 24+ buy the bond |
| Cannot use education exemption if buyer too young | Education exemption requires buyer to be 24+ at purchase |
| Grandchild pays tax when using for college | Ensure buyer is old enough before purchasing |
Mistake 5: Ignoring State Tax Consequences
You live in California and cash in $10,000 in bond interest. You pay federal tax at 22% but forget about California state tax at 9.3%. Your total tax is 31.3%, not 22%. You planned to pay taxes and thought you had enough left over, but state tax made the bill bigger than expected. To avoid this, ask your state’s tax authority or a tax professional whether your state taxes savings bond interest. If your state does tax it, add that percentage to your federal percentage to find your total tax rate.
| Problem | Solution |
|---|---|
| Only accounting for federal income tax | Calculate both federal and state tax rates |
| State tax bill is a surprise | Ask your state tax authority about bond interest taxes |
| Total tax rate is higher than expected | Plan for full tax burden before cashing in bonds |
Comparing the Choices: Pros and Cons of the Different Paths
| Choice | Pros | Cons |
|---|---|---|
| Custodian Account (You as Custodian) | You control the bonds until age 18; bonds are your grandchild’s property; cleaner tax situation for grandchild | You lose control at 18; grandchild might spend money you intended for college; account ends at 18 |
| Your Own Name (Gift Later) | You keep complete control; can change your mind; can access if emergency; own money stays yours | Requires you to remember to gift or put in will; you pay taxes on interest; bonds are your property, not protected for grandchild |
| Your Own Name (Pass Through Will) | Grandchild inherits with stepped-up basis; no capital gains tax on growth while you owned it; clear inheritance plan | Requires going through probate; family must wait to receive bonds; bonds are tied up after death |
| Education Exemption Strategy | Interest is tax-free if used for qualified college expenses; huge tax savings; works for any college; no restrictions on what school | Only works if buyer is 24+; only works for qualified expenses; grandchild must attend eligible school; complicated to claim |
| Series I Bonds (Inflation Protection) | Protects from rising prices; rate adjusts twice per year; good in high inflation times | Rate can go down; less predictable than EE; requires paying attention to rate changes; no doubling guarantee |
| Series EE Bonds (Predictability) | Guaranteed to double in 20 years; interest rate is locked in; simple to understand; easier to plan | Does not protect from inflation; rates are lower when inflation is high; less valuable if inflation erodes purchasing power |
The Processes: Step-by-Step From Idea to Bond Ownership
Step 1: Decide What Type of Account You Want
Think about whether you want to control the bonds until your grandchild turns 18, or if you want to keep control yourself. If you want your grandchild to take over at 18, choose a custodian account. If you want to keep the bonds yours and gift them later, choose your own name. Write down which option you chose and keep it somewhere you will not forget.
Step 2: Gather the Identification Numbers You Need
You need your Social Security number and your grandchild’s Social Security number. If your grandchild does not have one yet, go to your local Social Security office or visit ssa.gov to apply. It takes two to four weeks to get a Social Security number in the mail. You also need your bank’s routing number and your account number for your bank account that supports ACH transfers.
Step 3: Create Your TreasuryDirect Account
Go to treasurydirect.gov and click “Open Account.” Enter your email and create a strong password. Answer the security questions. If you want a custodian account, select “UGMA/UTMA account” during the setup process. If you want your own account, select “Individual Account.” Tell the website your name, address, phone number, and tax identification number.
Step 4: Link Your Bank Account
Provide your bank’s routing number and your checking account number. The website will make two small deposits to your bank account within one to three days. When you see these deposits, log back into TreasuryDirect and enter the exact amounts. This confirms that you own the bank account and that the account works for transferring money.
Step 5: Choose Your Bond Type
Decide whether you want Series EE or Series I bonds. EE bonds are predictable and guaranteed to double. I bonds protect you from inflation. First-time buyers often choose EE bonds because they are easier to understand. If inflation is high, I bonds might earn more. You can buy both types if you want, as long as you stay within the $10,000 yearly limit for each type.
Step 6: Decide How Much to Buy
Think about how much you can invest. You can buy as little as $25 or as much as $10,000 per year per bond type. If this is your first year, you might start with $500 or $1,000. If you have been doing this for years, you might buy the full $10,000. Remember that Series EE bonds cost half their face value, so a $100 face value EE bond costs $50. Series I bonds cost full price, so a $100 bond costs $100.
Step 7: Review the Interest Rate Before Buying
The website will show you the current interest rate for the bond type you chose. For EE bonds, you will see the guaranteed rate. For I bonds, you will see the composite rate (the combination of inflation and a fixed rate). Write down this rate. This is the rate you will earn for the life of the bond (for EE) or until the next rate change (for I bonds). You cannot get a better rate by waiting a few days. The rate for each bond is locked in on the date you buy it.
Step 8: Confirm Your Purchase
Review everything one more time. Check the bond type, the amount, the interest rate, and the owner name. Make sure you chose the right account type (custodian or individual). Click “confirm” to complete the purchase. TreasuryDirect will show you a confirmation number. Save this number in case you need to look up the transaction later. Your bank account will be charged within one business day.
Step 9: Receive Your Confirmation
You will get an email confirmation with all the bond details. You can also log into TreasuryDirect and see your bond in your account. The website shows you the issue date, the purchase price, the current value, and the value at maturity. Bookmark the TreasuryDirect website or save the login information somewhere safe. You will need to log back in later to check on your bonds or buy more.
Step 10: Set a Reminder for Future Purchases
If you plan to buy bonds every year, set a calendar reminder in December to buy next year’s bonds. You can buy up to $10,000 per year per bond type, and the limit resets on January 1st. Many grandparents buy in late December so they have until December 31st of next year to use their $10,000 limit. If you forget, you lose the chance to buy that year’s limit.
The Real People: Key Players in the Savings Bond System
The U.S. Department of Treasury is the government agency that creates and manages all savings bonds. The Treasury Secretary oversees the bond program and sets the interest rates. The Treasury has employees who run the TreasuryDirect website and handle all the technology. When you buy a bond, you are buying it directly from the Treasury. You do not go through a bank or broker.
The Bureau of the Fiscal Service is part of the Treasury Department. This agency specifically handles the TreasuryDirect program and all the bond purchases. When you have questions about how bonds work, you can contact the Bureau of the Fiscal Service. They manage the website, process purchases, and handle customer service. You can call or email them through TreasuryDirect if something goes wrong with your account.
Your bank is your partner in this process. Your bank holds the checking account that is linked to TreasuryDirect. When you buy a bond, money goes from your bank account to the Treasury. When you cash in a bond, the Treasury puts money into your bank account. Your bank handles the electronic transfers but does not own or manage your bonds. Your bank cannot see which bonds you own through TreasuryDirect. The Treasury keeps that information completely separate.
Your grandchild is the person who benefits from the bonds over time. If you set up a custodian account, your grandchild’s name is on the account but you make all the decisions until they turn 18. If you set up the account in your own name, your grandchild might not even know the bonds exist until you give them the money. Either way, your grandchild will eventually benefit from the money you invested and the interest it earned.
The IRS (Internal Revenue Service) is the federal tax agency. The IRS decides what counts as a qualified education expense for the education exemption. The IRS also enforces the rules about gift taxes and inheritance taxes. When you cash in a bond and owe taxes, you owe those taxes to the IRS. The IRS is separate from the Treasury, so sometimes their rules can seem contradictory. Understanding the IRS rules helps you avoid surprise tax bills.
Your state tax authority handles state income taxes on bond interest. Most states tax bond interest, but a few states do not. Your state tax authority is part of your state government, not the federal government. When you cash in a bond, you might owe both federal taxes and state taxes. Some states have different rules about gift taxes and inheritance taxes. Make sure you understand your state’s rules, especially if you live in a state different from your grandchild.
Legal Rules and Court Decisions That Matter
The law that controls savings bonds is found in 26 U.S. Code Section 135. This section spells out the education exemption for bond interest. It says you can exclude bond interest from your taxes if you meet specific conditions. The section also defines what counts as a qualified education expense. This law has not changed much in decades, so it is stable and predictable.
The 26 U.S. Code Section 2501 handles federal gift taxes. This section says you can give away up to $18,000 per year per person without paying gift taxes. If you gift bonds worth more than $18,000, you must file a gift tax return. The extra amount counts toward your lifetime limit. Most grandparents never hit this limit, but it is important to know about it if you are buying large amounts of bonds.
The Treasury regulations at 31 CFR Part 357 contain all the detailed rules about how bonds work. These regulations cover everything from how interest is calculated to what happens if you lose a bond. The regulations explain the one-year holding requirement and the five-year early redemption penalty. If you have a specific question about bond rules, these regulations have the answer.
The Uniform Transfers to Minors Act (UTMA) is a state law that most states have adopted. UTMA sets up how custodian accounts work. It says the minor takes control of the account at a certain age, usually 18 or 21. UTMA says the custodian must act in the minor’s best interest and cannot use the money for themselves. If you are setting up a custodian account, UTMA is the law that governs it. Check your state’s version of UTMA to see what age your grandchild takes control.
No major court cases have specifically changed how savings bonds work in recent years. The courts have upheld the education exemption rules and the gift tax limits. Courts have also upheld states’ rights to tax bond interest. The federal government’s authority to issue bonds and set their terms is not questioned by the courts. This means the rules you are learning today will be the same rules that apply ten years from now.
Frequently Asked Questions
Can I buy bonds for a grandchild without telling their parents?
Yes. You can buy bonds in a custodian account for your grandchild without asking the parents’ permission in most states. However, the parents might be upset if they find out later, especially if they have different financial goals for the child. It is better to talk to the parents first and get their support. If the parents oppose your plan, you could buy bonds in your own name and gift them through your will instead.
What happens if my grandchild turns 18 and cashes in the bonds for something I did not approve of?
Yes, they can. Once your grandchild turns 18 and takes control of the custodian account, they own the bonds completely. They can cash them in for any reason. You cannot stop them. If you want to maintain control, do not set up a custodian account. Buy the bonds in your own name and gift them through your will or a specific written gift agreement.
Do I owe gift tax if I give a grandchild savings bonds?
No, usually. You can give up to $18,000 per year per grandchild without owing any gift tax or filing paperwork. If you give more than $18,000 in one year, you must file a gift tax return. Amounts over $18,000 count toward your lifetime limit. Most grandparents stay under this limit, so no gift tax is owed.
Can I cash in a bond earlier than one year if it is an emergency?
No. The one-year holding requirement has no exceptions. You cannot get the Treasury to make an exception for emergencies, medical bills, or any other reason. If you need quick access to money, savings bonds are not the right choice. Use a regular savings account for emergency money instead.
Are savings bonds safe if the stock market crashes?
Yes, absolutely. Savings bonds are backed by the U.S. government, not the stock market. They are among the safest investments in the world. If the stock market crashes, your bond value does not change. Your money is still there and still growing. Bonds are much safer than stocks but earn less interest over time.
What is the difference between Series EE and Series I bonds again?
EE bonds are guaranteed to double in 20 years, with a fixed interest rate that never changes. I bonds have a changing interest rate that adjusts for inflation twice per year. EE bonds are more predictable. I bonds offer inflation protection. Choose EE if you want simplicity. Choose I if inflation is high or you want protection from rising prices.
Can my grandchild inherit my savings bonds if I die?
Yes. Savings bonds can be inherited like any other property. If you own bonds in your own name and write them into your will, your grandchild inherits them when you die. Your grandchild inherits the bond at its current value with no capital gains tax owed on the growth. If the bonds are in a custodian account, your grandchild owns them already, so there is nothing to inherit.
Will I lose money if I keep a bond past 30 years?
No. After 30 years, a bond stops earning interest, but you do not lose money. The bond is worth whatever it was worth at 30 years, and it stays at that value. You do not owe money to the government or anyone else. You can still cash it in for the full value at any time after 30 years, but there is no point in waiting because the money is not growing anymore.
Do I need to tell the IRS when I buy savings bonds?
No. You do not report savings bond purchases to the IRS. You only report taxes when you cash in the bonds. You tell the IRS how much interest you earned and pay taxes on that interest. The IRS tracks this through tax forms you receive when you cash in the bonds, not through your TreasuryDirect account.
Can I buy bonds with a credit card or just with a bank account?
No, just a bank account. You must buy bonds through TreasuryDirect with direct transfers from your checking account. You cannot use a credit card or debit card. You cannot wire money or mail a check. The only way to buy is through electronic transfer from your bank account linked to TreasuryDirect. This system protects the government and you from fraud.
What happens if I buy a bond and then change my mind the next day?
You cannot cancel the purchase. Once you click confirm and the bond is issued, the purchase is final. You can sell the bond back to the government, but you must wait at least one year. If you change your mind within 24 hours, you are stuck with the bond until year one. The bond will be worth less than you paid if you try to cash it in immediately because you lose interest.
Can I use bond money to pay for any kind of school or just college?
College, university, and trade school count as qualified schools. Primary school and high school do not qualify for the education exemption. Online schools count if they are accredited and eligible. Technical schools and apprenticeships usually count. Check with the IRS to confirm your specific school qualifies before buying bonds with the education exemption in mind.
Do bonds keep earning interest after my grandchild turns 18?
Yes, absolutely. Bonds keep earning interest until they mature at 30 years. If your grandchild takes control of the account at 18, they can keep the bonds growing for another 12 years until age 30. The bonds do not know that the owner changed. They just keep earning interest the same way they did before. Your grandchild could turn 80 and the bond would still be earning interest if it has not been cashed in yet.
What if my grandchild’s Social Security number changes or they get a new one?
The bond stays with the original Social Security number. You cannot change the Social Security number on a bond after it is issued. If your grandchild’s number changes, there might be tax issues when you cash in the bond. Work with a tax professional to make sure the IRS understands which person owns the bond. In most cases, the Treasury handles this without problems.
Can I buy bonds for a grandchild who is not a U.S. citizen?
Probably yes, but check the rules first. U.S. citizens and resident aliens can own bonds. Nonresident aliens usually cannot. If your grandchild is a U.S. citizen but living outside the U.S., they can probably own bonds. If your grandchild is not a U.S. citizen, you may not be able to open a custodian account in their name. Consult with an immigration attorney or tax professional to confirm before buying bonds.
How do I know if my bond is earning enough interest or if I should invest in something else?
Compare the interest rate to other options. EE bonds earn about 3.5% per year. I bonds currently earn about 4.9% per year. High-yield savings accounts might earn 4-5% per year. Stock market returns are unpredictable and risky. Bonds are safe but earn less than stocks over long periods. If safety is your priority, bonds are fine. If you want to take more risk for higher returns, stocks or stock index funds might be better.
Can I move my bonds from one TreasuryDirect account to another?
No, not directly, but you can cash them in and rebuy. If you want to move bonds from your account to your grandchild’s account, you must cash in the bonds and rebuy them in the new account. When you cash them in, you trigger taxes on the interest earned. This usually is not worth doing. It is better to set up the account correctly from the start.
Related reading
- Which Is the Best Savings Account for Grandchildren? (w/Examples) + FAQs
- Are Savings Bonds a Good Investment for Grandchildren? (w/Examples) + FAQs
- Can I Transfer My Premium Bonds to My Grandchildren? (w/Examples) + FAQs
- Should I Set Up a Trust for My Grandchild? (w/Examples) + FAQs
- When Are Bonds a Good Investment? (w/Examples) + FAQs
- What’s Your Cost Basis in a Savings Bond? (w/Examples) + FAQs
- Are Municipal Bonds a Good Investment? (w/Examples) + FAQs