savings

Savings bonds: Series EE or Series I?

Don TaylorQuestionDear Dr. Don,
I have a new grandson and would like to purchase savings bonds for his future and/or college. Which savings bonds are better: the Series EE or the Series I bonds? Also, where do I purchase the bonds?
-- Cathy Collegiate

AnswerDear Cathy,
If these are my only two options, I like the Series I savings bonds better because the interest earned is tied to the inflation rate, as measured by the Consumer Price Index. Education inflation has outstripped CPI over the past few decades, but having some inflation protection is better than no inflation protection.

If your grandson owns the bonds in his name, he won't be able to take advantage of tax exclusion that may be available to his parents. Parents who own bonds in their own names often get a tax break when redeeming them for a child's qualified educational expenses. The TreasuryDirect Web page "Education Planning" spells out the qualification requirements.

In the section titled "Another Education Savings Option," the same Web page explains how children who own bonds in their own name can manage the tax impact by declaring the interest income each year on their income tax return.

Savings bonds can be owned in physical (paper) or electronic form. For your grandson to own electronic bonds, his parents will have to set up a TreasuryDirect account and then set up a "minor" account for the child linked to the parents' account. You will also need a TreasuryDirect account to purchase the electronic bonds for your grandson.

You can still buy paper savings bonds from participating financial institutions in your area. Ask your bank if it participates; if not, the bank should be able to tell you which banks in the area sell savings bonds.

As in most cases, it makes sense to talk to the parents about your plans. After all, they're the ones who have to file an annual tax return for the child to declare the interest income on the savings bonds. They may prefer you help fund a Section 529 college savings plan or Coverdell Education Savings Account, or CESA, for the child.

Check out the "Grandparents" page on Savingforcollege.com for more good ideas on college fund investing.

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