Learn how to give bonds as a gift and the pitfalls you need to watch out for.
How To Get Bonds
There are a few basic types of bonds.
U.S. Treasury bonds: Bonds issued by the U.S. federal government Foreign government bonds: Bonds issued by other governments Municipal bonds: Bonds issued by state and local governments Corporate bonds: Bonds issued by companies
To get a bond, you’ll need to purchase it from the issuer or on the secondary market. The U.S. government sells Treasury bonds and savings bonds through a website, TreasuryDirect.gov. Savings bonds can be purchased as gifts while other marketable securities issued by the U.S. Treasury such as Treasury bonds, T-Bills, Treasury notes, and TIPS cannot be purchased as gifts. You can open an account with TreasuryDirect and place gift orders for savings bonds directly from the government. Buying other types of bonds usually involves working with a brokerage. You’ll have to open an account with a broker. Once you do, you may have the option to purchase corporate and municipal bonds directly from their issuers when there is a new bond issued. You also have the option to buy bonds from other bondholders.
How To Gift Bonds
Giving savings bonds as a gift has long been a popular way for parents and family members to give their children a financial present that can grow over time. With paper bonds becoming a thing of the past, the government has worked to make sure that gifting bonds is still an easy thing to do. To give a bond as a gift, both you and the recipient must have accounts with TreasuryDirect. You also need to know the recipient’s full name, Social Security number, and TreasuryDirect account number. The Treasury has video instructions on how to purchase and deliver bonds to someone as a gift. If you want to give other types of bonds, such as corporate bonds or municipal bonds as a gift, you’ll need to work with your broker. The first step is buying the bonds. Once you’ve purchased them, work with your brokerage company to transfer them to the recipient’s account. Each broker has its own process for transferring securities. Generally, the process will be simpler if the recipient has an account with the same broker as you. Transferring the bonds to an account at another broker can take some time and may incur fees.
What To Watch Out For: Rules, Regulations, and Reminders
Whenever you’re giving a financial gift, the first thing to look out for is the gift tax. There is an annual limit per year that you can give to someone without incurring any gift taxes. Amounts over that threshold count against your lifetime gift exclusion. Only gifts surpassing the exclusion will be subject to the gift tax. Another consideration is taxes the recipient may owe. The recipient will have to pay taxes on any capital gains they receive when selling the bond, as well as on any interest payments they receive. “One way around the federal tax of a savings bond is to use the funds for higher education purposes,” Nick Stecklin, a CFP with North Capital in Salt Lake, noted in an email to The Balance. If you use the proceeds from redeeming a savings bond for qualified education expenses, the government won’t charge taxes on that income, he said. Finally, you should think about the returns that the bond offers. When overall interest rates are low, any bonds you gift might not earn much interest. Conversely, when interest rates are high or rising, your gift bonds may earn a nice amount of interest. Another alternative to consider is to purchase I bonds, which are designed to keep up with inflation.
Transaction Costs To Consider
When you’re giving bonds as a gift, you have to consider the cost of both purchasing the bonds and transferring them to their new owner. First, you’ll have to pay any fees or commissions related to buying the bonds. Each broker sets its own fees, but you could pay anything from a few dollars to hundreds depending on the type and the value of the bonds. You then have to pay any fees charged by your broker for transferring the bonds to a new owner. Many brokers will do internal transfers to other accounts for free but will charge if you’re sending the securities to another brokerage company. Check your broker’s fee schedule to make sure you know the fees you’ll have to pay.
Creative Gift Presentation Ideas
These days, bonds are largely digital things. Paper savings bonds have become far less common. However, it can be underwhelming to give or receive a gift without having something physical to go with it. One creative option for gifting a bond is to give it alongside something representative of the bond you’re gifting. For example, if you’re giving someone a bond issued by a candy company, you might give them a note explaining the gift alongside a small basket of candy. If you’re giving a savings bond, especially to a child, giving the gift alongside a book about money or investing or something like a collection of the U.S. state quarters might be a good way to give them something physical to remind them of the gift and get them more interested in the bond they’re receiving.
Benefits of Gifting Bonds
There are a few perks to gifting securities like bonds. One is that there is an annual exclusion before financial gifts count toward your lifetime gift tax exclusion. If you plan to leave a large amount to your heirs, giving them smaller gifts over the course of many years can reduce the overall amount of tax you pay in the future. Gifting a bond can also help you defer or reduce taxes. Giving someone a bond instead of selling it and giving them the resulting cash means you won’t owe capital gains taxes. But more importantly, by gifting a bond you’re giving something that will grow in value over the years, aiding the recipient’s wealth creation. And who knows, it may even spark their curiosity about investing.
