US bonds for the kids?! Yes, and for Aunt El, too

Take a survey of a bunch of children. Ask them what they want for Christmas. Not one of them is likely to say, ``I want a United States Savings Bond.''

Yet many of them will get a savings bond for Christmas from someone, probably a grandparent, or an aunt or uncle.

Savings bonds continue to be a popular holiday gift, says Steven Meyerhardt, spokesman for the US Treasury Department's savings bond program. And as interest rates climb, they become an even better deal for all savers.

Starting a year from now, adults will have another reason (sorry, kids) to give savings bonds. The latest tax law permits the bonds to be used for college. As of Jan. 1, 1990, interest on savings bonds will be free of federal taxes as long as they are used to pay the college expenses of children or their parents.

Except for this new wrinkle, the basic rules for savings bonds are the same, Mr. Meyerhardt says.

For many of today's adults, their first exposure to any kind of savings came in the form of those little stamps they bought at school and pasted in a book in the 1950s. When your book was filled, you got a savings bond. Some children were better at this than others; they may still have a few old bonds in the bottom of a drawer to prove it.

Since the days of the little books, of course, the interest rate has become far more attractive. Instead of the low fixed rate they paid before, the bonds now pay a market-based rate that is adjusted every six months. The rate is tied to the interest on five-year Treasury notes and is at least 6 percent if the bond is held for five years.

The rate is set every March 1 and Nov. 1; for the current six months, it is 7.35 percent. If you bought a bond today, the yield paid over five years would be based on the average of all the six-month rates in effect over that time, Meyerhardt says.

Once you buy a bond, it cannot be redeemed at all for the first six months, but after that, it can be turned in for the entire principal - sort of like an early withdrawal without the penalties. No interest is paid, however, on bonds bought and sold in the same calendar year.

Although you get only the full guaranteed rate if you hold the bond for a full five years, you can keep it for as long as 12 years and get all the interest paid over that time. But unlike the old Series E bonds sold before 1982, which earned interest forever, the newer Series EE bonds stop paying after 12 years.

In a way, Series EE bonds are sort of like the increasingly popular zero-coupon bonds issued by companies. That is, they are purchased at a discount from their face value, they don't pay any interest during their lifetime, and the owner gets the full value at maturity.

But unlike many zero-coupon bonds, savings bonds don't have the ``phantom tax'' problem. This is the requirement that you pay taxes on the accrued interest each year, even though you don't have use of the income until the bonds mature.

But savings bonds are tax-free until maturity, so there's no phantom tax. They are always free of state taxes, by the way.

They are also a whole lot cheaper than corporate zeros. They can be bought for as little as $25, which is half the face value of a $50 bond. Other bonds sell for $37.50, $50, $100, $250, $500, $2,500, and $5,000.

For people who are retired or approaching retirement, the federal tax burden on EE bonds can be delayed further. Another type of savings bond, known as Series HH, can be purchased only by exchanging a Series EE bond for it; it cannot be bought directly.

The HH variety is sold at full face value, and interest payments are sent out every six months. So a retiree could exchange E or EE bonds for at least $500 of HH bonds (that's the lowest denomination available), and get the income at what may be a lower tax rate.

Apart from their tax-savings advantages, one of the more attractive features of savings bonds is their safety. In these days of bank failures and thrift bailouts, that's no small advantage.

The bonds can be purchased through most commercial banks, and if they are lost or stolen, they will be replaced without charge. For replacement, write Department of the Treasury, Bureau of the Public Debt, Parkersburg, WV 26106. Include the denomination of the bonds, serial numbers, the issue date, names and addresses on the bonds, and your social security or tax identification number. For this reason, keep a copy of this information separately from the bonds themselves.

There are a few disadvantages to savings bonds. They cannot, for example, be used as collateral, sold, or given away. (If you do give one as a gift, the bank must issue it in the name of the recipient.)

Savings bonds are not meant for salting away large amounts of money: There's a $30,000 limit on the face value of Series EE bonds that any one person can buy in a year. And you should be sure you're not going to need any of the money for at least six months, since Series EE bonds cannot be touched for that period.