Deciding what to do with those savings bonds

Q. My kids received savings bonds from a great aunt for the holidays. Are they worth keeping? All our other college savings are in a 529 plan.
— Investor

A. There is nothing wrong with savings bonds.

When the market is up, people say that the returns on savings bonds are too low. But after the recent stock market dip, there are lots of people who think savings bonds are a pretty good idea, said Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton.

“529 plans are good but tied into the stock market. In the past three weeks you have seen a pretty substantial drop in account values,” he said. “There is something to be said about tank-like investments that do not go fast, but always go forward.”

The savings bonds will earn interest, and you won’t have to worry about the larger market.

The interest rate is fixed and compounds every six months, and it will stop earning interest in 30 years, said Alison Williams, a certified financial planner with Stonegate Wealth in Oakland.

“If the bonds are for higher amounts, the interest will be worth the wait, albeit, with a higher tax ramification when redeemed,” Williams said. “If they are for smaller amounts, you can save them and surprise your children with them down the line. Receiving any amount in your 20s, even $100, is exciting.”

If you do decide to sell the bonds, make sure to remember that most U.S. savings bonds can’t be redeemed until one year from purchase, and you’ll incur a three-month interest penalty if the bonds are redeemed within five years of purchase.

“Once redeemed, you can deposit the cash into your children’s respective 529 plans or custodial accounts in their names,” Williams said.

Karin Price Mueller writes the Bamboozled column for The Star-Ledger and she’s the founder of NJMoneyHelp.com. Click here to sign up for the NJMoneyHelp.com weekly e-newsletter. Like NJMoneyHelp.com on Facebook and follow it on Twitter.