I have five neices and nephews that I’d like to start buying savings bonds for, for their college education. It’s pretty darned easy for me, that I can buy “I” or “EE” bonds through a payroll deduction, and it gets directly mailed to them (I already take out $100 for myself for “I” bonds).
But here’s the crux: I know that “I” bonds are bought at face value, and have a guaranteed interest rate a point or two higher than that of the current inflation rate. However, the “EE” bonds are bought at half-face value (i.e. a $100 bond is bought at $50, and is guaranteed to mature to $100 years down the road). Now, these li’l ‘uns are 5 yrs, 4 yrs, 3 yrs, 2 yrs, and 18 months. Time is a luxury right now, that if I model the bonds as an annuity, I figure a EE bond at $50 (face value) a month would save ‘em up nearly $10k by the time they get ready to hit college. “I” bonds would be more (higher interest rate), but I’m not sure I can swing $250 per paycheck.
Is there something fundamentally different with either of them, that I would opt one over the other? I’m not a financial guru, so I don’t know some of the loopholes, but I would like to make an informed, educated decision. I’ve tried looking at some of the different government websites, but they all say the same thing.
Also (this just popped into my mind), are these payroll deductions before or after they deduct taxes?
Tripler
And yeah, I know this is going to take years of patience. . . but if I never see it, I’ll never miss it.
Besides the fact the EE bonds are bought at discount and I bonds are bought at face value, the I bonds are protected against inflation. Semi-annually, the interest rate is adjusted to account for inflation. The biggest risk for EE bonds, like all other fixed income instruments, is that their rates can be degraded by inflation over time. I just recently bought an I bond for a newborn.
Buying an EE bond with a face value of $50 is investing $25. The whole ‘buying at half face value’ is an illusion: if you turn in your savings bond right after you buy it, you’re going to get $25 back. As you know, I bonds are guaranteed to keep up with inflation; EE bonds are not. If you want to invest $25 per month per child, you can buy an EE bond with a face value of $50 (actual value, $25). Or you can buy a $25 I bond. The latter is my recommendation, because of the guaranteed return and (lately) higher interest rate. That makes for an outlay of $125 per month–the same as if you bought “$50” EE bonds each month.
I need to add that $25 I bonds are not available by mail–you can only purchase them (or any denomination, even $29.53, say) electronically through TreasuryDirect.
Can I suggest something? Do you get paid weekly? Biweekly? I suggest just getting fewer bigger bonds. I had a stack of 60 or so 100 dollar EE bonds laying around, and when I went to cash them, it took like an hour. I could only imagine that it would be worse if they had 200 $25 dollar bonds.
But then again, once they have the bonds, you don’t have to worry about it again.
As a former young parent I can say that it doesn’t matter one whit which you buy since the parents will cash them in as soon as they can (what is the waiting period, six months?). Raising kids ain’t cheap and who knows if Junior will be college material.
I get paid bi-weekly, but I don’t think I’ll ever see the bonds. I’ll get the wee ones’ SSNs, and have them mailed directly to their folks homes. That’s what I do with my “I” Bonds–they get taken out of my paycheck, and I get paper copies every month. When I deploy again, I’m sending them to my folks house in Jersey. They’ll still have my name and SSN on 'em, but at least be mailed to a safe place.
But dropzone gave me another clue: Can a parent cash in a bond if Junior’s name and SSN are on the copy as the “owner” (I’d be the ‘purchaser’)? That’s part of the reason I wanted to do bonds–they’re secure from Mom & Pop (I really do trust the Moms & Pops).
On the other hand, do banks allow an annuity account to be set up like a trust fund with the tyke’s name and SSN as the sole beneficiary? I’m not sure about interest rates, but I wonder if it can be done. . .
There are ways; my great-grandfather did something like this, but I really don’t know the details. I’ll ask the folks next time I talk w/them, although I’m sure someone who knows better will have an answer by then. This may be something to look into if the parents are the type who have no qualms about looting their children’s savings.
