I Bonds or UTMAs??

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
slimshady
Posts: 83
Joined: Sun Aug 12, 2012 8:48 am

I Bonds or UTMAs??

Post by slimshady »

Hello everyone.

Quick question for the Bogleheads. In your opinions, which would be the better investment for my 2 nephews ages 5 and 7??

They have been receiving I bonds since they were born. My family currently has 3k for the older child and 2K for the younger. Should we continue purchasing these bonds or open UTMA accounts with either a local bank or brokerage firm? I was considering an account with Janus which would require a $500 opening balance. Just not sure if it would make sense considering the small amount of contributions going into the account- perhaps up to $600 per child. However, I did like the idea of the children owning stock index funds and learning about the market as they were to grow older. That would be a learning experience for them , something I knew very litle about until later in life. (They would be be eligible for the UTMA at the age of 21).


My sister does fund 4k per year into their 529 plans.

Any suggestions??

Thanks, Rich
bondtrader1979
Posts: 2
Joined: Mon Nov 12, 2012 1:06 pm

Re: I Bonds or UTMAs??

Post by bondtrader1979 »

Hi Rich,

Let me start by saying that I don't know much about UTMAs. However I think there is a very compelling reason to buy i bonds right now.

As you may know already i bonds work like a Treasury Inflation Protected Security (TIPS) in the sense that they pay a fixed rate of interest and a floating rate of interest designed to protect the income from inflation. There is a big difference between TIPS and i Bonds however, which is that the fixed interest rate on the i bond is not allowed to go below zero. In a normal environment this would not be an issue, however currently the real interest rate (fixed component) is negative. So if you buy a 5 year TIPS for example, you are giving up -1.40% on the fixed portion of the interest payment. With the ibond you do not have to give up that -1.40% and you still get the full inflation adjustment. This in my opinion makes them an exceptional buy at the moment, and others seem to agree as their purchases are up over 50% in the last year.

A second reason to potentially consider i bonds is because if they are used for education expenses then they are tax free. If you are sure that all the money in the 529 plan is going to be used for education expenses then there are a few reasons why the 529 plan is the superior option. However if you are not sure all the money is going to be used for education then the i bonds can be a nice compliment as they do not have the 10% penalty like the 529 for money not used for education. Keep in mind however that if you want the tax break the i bonds must be held in the name of the parent. The exemption may also not apply if your adjusted gross income is above 71K for a single filer or $106,000 for a joint filer. Check IRS form 550 if you are above these amounts.

I would also argue that the bond market provides a better education than the stock market. With i bonds you are learning about real interest rates and inflation which is a great segway into things like the Fed and how all these things combine and affect the economy. You are also learning about saving and borrowing which are the two places most people mess up. The bond market also tends to lead the stock market so when they do start learning about stocks they will already have a leg up.

Hope that helps.

Dave
Topic Author
slimshady
Posts: 83
Joined: Sun Aug 12, 2012 8:48 am

Re: I Bonds or UTMAs??

Post by slimshady »

Dave- Thank you for responding to my inquiry. You raised several points with regards to the benefits of both I bonds as well as 529 plans.

I had been leaning towards the I bonds, just wanted some reassurance that it was a smart way to invest for my nephews.

As far as my sister is concerned, her children will be attending college. If I had a guarantee that her plan for them would be realized, I would absolutely go with the NY529 plan. However, I have learned in life that there are few guarantees and therefore I can not commit to the 529.

I have not ruled out a UTMA account. Perhaps if family contributions permit, we wuld be in a position whereby 50% can go to the ibonds and 50% can go into a UTMA account. Just a thought.

Thanks again.
Rich
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: I Bonds or UTMAs??

Post by dbr »

So, why should a person opt for a UTMA? Some things a UTMA does include:

1. The money is an outright and unrestricted gift to the child. If the purpose is education and life experience that might not be a bad idea. On the other hand misunderstandings by donors and custodians can lead to some issues with UTMA's.

2. The actual investments can be almost anything. Again ideal for the purpose compared, for example, to I bonds.

3. Technically the child is now responsible for tax reporting. Here the amounts appear to be too small to require a tax return but the exercise might be instructive beginning at some point. On the other hand screwing this up can leave some poor young adult in tax trouble before they even realize what taxes are.
Mrxyz
Posts: 744
Joined: Wed Feb 29, 2012 5:12 am

Re: I Bonds or UTMAs??

Post by Mrxyz »

Make sure the I bonds are in name of the parents - the parent own them and will use them tax exempt for their kid's education. If they are in the child's name, then they cannot be used for college expenses tax exempt.
Topic Author
slimshady
Posts: 83
Joined: Sun Aug 12, 2012 8:48 am

Re: I Bonds or UTMAs??

Post by slimshady »

dbr,mxyz- Thanks for responding. I do not expect any problems with UTMA accounts. Any invested monies will be of a small amount so the reporting of taxes should not be an issue. My sister was in fact listed as a co-owner on the ibond purchases so hopefully it will enable her to use the bonds tax free for the kids education if they decide to go that route.

Rich
sport
Posts: 12094
Joined: Tue Feb 27, 2007 2:26 pm
Location: Cleveland, OH

Re: I Bonds or UTMAs??

Post by sport »

slimshady wrote: My sister was in fact listed as a co-owner on the ibond purchases so hopefully it will enable her to use the bonds tax free for the kids education if they decide to go that route.
I don't think that will work. I believe the kids cannot be owners for this feature. They can be beneficiaries however.
Jeff
User avatar
Mel Lindauer
Moderator
Posts: 35782
Joined: Mon Feb 19, 2007 7:49 pm
Location: Daytona Beach Shores, Florida
Contact:

Re: I Bonds or UTMAs??

Post by Mel Lindauer »

jsl11 wrote:
slimshady wrote: My sister was in fact listed as a co-owner on the ibond purchases so hopefully it will enable her to use the bonds tax free for the kids education if they decide to go that route.
I don't think that will work. I believe the kids cannot be owners for this feature. They can be beneficiaries however.
Jeff
That's correct. For the I Bonds to qualify for the tax-free educational benefit, the child cannot be named as an owner or co-owner. However, the child can be named as a beneficiary.
Best Regards - Mel | | Semper Fi
sscritic
Posts: 21853
Joined: Thu Sep 06, 2007 8:36 am

Re: I Bonds or UTMAs??

Post by sscritic »

slimshady wrote:My sister was in fact listed as a co-owner on the ibond purchases so hopefully it will enable her to use the bonds tax free for the kids education if they decide to go that route.
I thought your question was about the future, not the past. Those were paper bonds bought long, long ago in the dark ages. We live in different times. Unless you are going to use your tax refund, the new I bonds you are going to buy for your nephews will be at TreasuryDirect. There are no coowners. The minor can't open an account. A parent or aunt can open their own account and create a minor linked account for the minor using the minor's SSN on the minor linked account. This account works like a UTMA; the bonds belong to the minor, the minor pays taxes, and at maturity (minor's, not bond's), the minor takes control. Plus, the minor gets no tax break for education.
Topic Author
slimshady
Posts: 83
Joined: Sun Aug 12, 2012 8:48 am

Re: I Bonds or UTMAs??

Post by slimshady »

Yes, these bonds were bought before treasury direct became an option for purchasing. Thank you all for clarifying.

While on topic, it was suggested to me the other day to open custodial accounts using e-trade. Suposedly, their minimum opening balance is $500 per account.

Does anyone have thoughts on perhaps going this route in lieu of the I bonds??

Thanks,
Rich
sscritic
Posts: 21853
Joined: Thu Sep 06, 2007 8:36 am

Re: I Bonds or UTMAs??

Post by sscritic »

Should we continue purchasing these bonds

Current rules are pertinent, not past rules, for deciding what to do today, tomorrow, or further into the future. The fact that you could and did buy paper bonds in the past is irrelevant to the question of whether you should open a TD account to buy new bonds.

Did you change the question? Have you already ruled out I bonds?
Topic Author
slimshady
Posts: 83
Joined: Sun Aug 12, 2012 8:48 am

Re: I Bonds or UTMAs??

Post by slimshady »

sscritic- No, the question did not change. I have decided to open a TD account and create the minor linked account. My sister and husband are both on board. Thanks for your help.

Rich
Post Reply