Q: We have two granddaughters and have been investigating some sort of “lay away” plan for them. We have a number of series EE bonds left over that we used for our children’s education and would like to gift them for their education down the road. Is there a way in which we can transfer these bonds into the grandchild’s name without creating a taxable event for us or the grandchildren?


A: Like most financial products, savings bonds have numerous twists and rules.

First, a brief on U.S. Savings Bonds. The investment allows your money to compound tax-deferred until they’re cashed in. You buy the bonds with after-tax dollars. You’ll pay ordinary income taxes on the interest at redemption.

There are two main kinds of savings bonds, Series EE and I-bonds. Rates for EE bonds issued after May 2005 carry a fixed rate of return. (The annual interest rate for EE Bonds issued from Nov. 1, 2015, through April 30, 2016, is 0.10 percent.) I-bonds are designed to hedge against inflation. The return on an I-bond is made up of two parts: a fixed interest rate and a rate that adjusts to changes in the consumer price index. (The composite rate for I-bonds issued through April 30, 2016 is 1.64 percent.) Despite its low rate, I like I-bonds because of the inflation protection.

Now to your question. Jackie Brahney, marketing director at Savingsbonds.com, notes that removing the primary owner’s name from a savings bond while they’re alive comes with a tax tab. Taxes are going to be paid, either by you or the grandchildren.

However, Brahney added, there are several other important factors to consider, including the interest rates the bonds are earning, how much interest has accumulated on each bond, when the bonds will reach final maturity, your personal tax bracket and how the bonds are currently registered (are there co-owners or beneficiaries listed?). One possible strategy is spreading out the bond sales, depending on the maturity date of the bonds, the rate of interest on the bonds and your tax bracket each year. Harvesting the bonds smartly is a way to maximize returns and managing the tax bite.

You can learn much more about your savings bonds, including the value of your old bonds and their maturity dates at www.treasurydirect.gov. You could also check out www.savingsbonds.com (a private site; it has nothing to do with the government).


Christopher Farrell is senior economics contributor, “Marketplace,” commentator, Minnesota Public Radio.