Living with credit

Baby bonds are bygone, buy something better

Kristie Aronow

When my nephew was born, I knew I wanted to get him something lasting. The tradition of buying a shiny piggy bank has, for me, lost its appeal. At best, the child will be putting Tooth Fairy money into it, at worst it will be sold in a garage sale. Either way, more money could be spent on the piggy than the kid will ever bank.

In a nod to tradition, I decided to give my newest nephew an investiment I thought would be both fiscally relevant and easy to purchase: a savings bond.Baby bonds are bygone, buy something better They turned out to be neither.

Savings bonds got their start in the 1930s, pitched as a safe investment that helped our country. The U.S. government needed bonds to help pay for Roosevelt’s new programs aimed at lowering unemployment. Bonds were most popular during the height of World War II. In 1944, when bond-buying peaked, Americans bought $16 billion in bonds, which would equal about $213 billion today. Popularity faded the ’80s and ’90s, and now they are nearly nonexistent.

In fact, due to digitizing and poor interest rates, bonds have actually become relics in the gift giving world. Only $2.4 million of them were sold in 2011, which is equivalent to about $180,000 in 1944.

Why bonds are awful
Before the switch to digital bonds, which took place Jan. 1, 2012, as an effort to save the U.S. Treasury Department millions, you could buy a savings bond from almost any local bank. The bank would supply a form, you’d fill it out and in a few weeks, your postal carrier delivered a paper bond in your mail.

Today, bonds are only available via the Treasury’s website, TreasuryDirect. There’s one exception: You can still get a paper bond at tax time if you send in IRS Form 8888 to use a portion of your federal tax return to purchase Series I savings bonds, the inflation-adjusted cousin of the traditional Series E bonds.

If you want to buy a savings bond as a gift, the process is even more cumbersome. For example, to give one as a gift to a child, the parent or legal guardian must first set up an account and then create a linked account for the newborn. As the gift giver, you too must create a TreasuryDirect account. (That’s three accounts that must be created before you can purchase a single bond.)

“I remember cashing in savings bonds when I was going to college,” says Brian Frederick, a principal with Stillwater Financial Partners. “There are a lot more hoops to jump through with savings bonds now and the interest rates are bad.”

The pre-recession interest rates of 3 percent are gone (not to mention the glorious 9 percent rates from the early ’80s). Now, bond holders receive a measly 0.2 percent annual return on Series E and 1.18 percent for Series I savings bonds. Rates are set every six months. When a bond is purchased, you are stuck with the interest rate offered during the time of purchase for the lifetime of bond. “People who are in savings mode aren’t going to get the best return,” says Wesley Gunter, a financial solutions adviser at Merrill Edge.

With low returns and a purchasing process that can cause migraines, what’s an aunt (or uncle or grandparent) to do?

The best one-time gifts to offer babies a financial foothold

Online options

Pros: The online world offers a plethora of savings accounts that have a better interest rate than savings bonds. Some of the best options include Barclays, American Express Bank and Ally Bank. A bonus of an online savings account is the ability to tie social media into the plan. Sites such as SmartyPig and TrustEgg offer excellent returns and come complete with social media promotions for third-party contributions.

Con: If you’re looking to just give a one-time gift, the parent should set up the account for the baby. Fee structures vary for different kinds of accounts, so reading the fine print is essential.

529 college savings plan
If you want to help a child save for higher education costs, this is a good place to start. An unlimited number of third parties can donate to this plan. The plans have tax-free incentives and, once a child is enrolled, require minimal maintenance. Sites are popping up across the Internet to help people donate to these plans, including GradSave, FiPath, Gift of College and Give College.

“With the savings bond rates being low, and college getting out of control for what it costs, a 529 is the avenue a large majority of people go down,” Frederick says.

Gunter of Merrill Edge, is a new dad himself. He says the 529 is what he decided his child should have. “I feel that a 529 plan gives me the greatest protection against inflation and rising costs.”

Cons: Like online accounts, unless you’re going to make regular contributions into a 529, a parent or guardian should be the one to set it up. The plans are complex financial instruments and you’ll have a huge variety of investment choices and their performances will vary greatly.

Stock shares
Give a child a piece of Disney or perhaps their first taste of Tiffany’s by buying a single stock share of the company. Sites such as One Share and Give A Share offer single stocks as framed gifts. Plus, it could be worth something major in a few decades.

Cons: The sites offer numerous companies to pick from, including Hershey Foods, Harley, Microsoft or Nintendo. Stock prices run from $30 into the thousands, plus you have to pay a “certificate” fee, framing costs and have the option of engraving and finish choices.

“It’s more what I call a novelty,” Frederick says.

The bottom line
If you’re still bent on buying the newest addition to your family a savings bond, check out one of these step-by-step guides provided by TreasuryDirect to ease the process: video, instructions or infographic.

Personally, I consulted my nephew’s parents to see which option they’d prefer. I ended up cutting the tyke a check for a 529 plan.

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  • Lauren

    In addition to some of the other 529 savings plan websites that you mentioned, I would also recommend College Backer. Their simple platform allows you to start a 529 plan and share it with friends and family so that they can contribute to the savings as well.