I-bonds with kids

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newpup
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I-bonds with kids

Post by newpup » Mon Oct 14, 2019 5:14 pm

Hi all-
Since I bond rates may be dropping 11/1, I am considering buying soon. My thought is to buy $30k jointly between 3 children as co-owners, thereby securing an inflation-protected, tax-deferred return of 0.5% + inflation (current total of 1.9%). If I need the cash, I can redeem the bonds. If I never need them, I can let my kids redeem them in 5-30 years, likely at a lower income tax rate (mine is 37% federal). Am I missing something with this plan? It seems like a great way to have my cake and eat it too with annual gifting to remove funds from my estate.

From Zack's finance:
Bond Co-Ownership
When co-owned, bonds belong equally to both owners. Either person can cash in a bond without the other person's approval or knowledge. Upon the death of one owner, the surviving owner is the only owner of the bonds. The bonds do not become part of the decedent's estate. Only people, not organizations, can co-own savings bonds. Saving bonds cannot be titled in the names of more than two owners.

jeff1949
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Re: I-bonds with kids

Post by jeff1949 » Mon Oct 14, 2019 5:48 pm

Sounds like you have it figured out fine. Just remember that you cannot cash them in for one year.

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Mel Lindauer
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Re: I-bonds with kids

Post by Mel Lindauer » Mon Oct 14, 2019 6:07 pm

One possible problem with your plan.

If the children are younger than college age, the I bonds could be used tax-free for qualifying educational expenses, but NOT if they're listed as a co-owner.

However, they could be listed as the beneficiary and the bonds could then be used for their qualifying educational expenses.
Best Regards - Mel | | Semper Fi

Topic Author
newpup
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Re: I-bonds with kids

Post by newpup » Mon Oct 14, 2019 6:20 pm

Mel Lindauer wrote:
Mon Oct 14, 2019 6:07 pm
One possible problem with your plan.

If the children are younger than college age, the I bonds could be used tax-free for qualifying educational expenses, but NOT if they're listed as a co-owner.

However, they could be listed as the beneficiary and the bonds could then be used for their qualifying educational expenses.
Thanks Mel. My income is above the phaseout threshold and my primary interest is gifting to my kids to lessen any potential future estate tax burden while maintaining the ability to "claw back" gifts if my finances go south for some reason. Do you think co-ownership makes more sense in my situation?

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Mel Lindauer
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Re: I-bonds with kids

Post by Mel Lindauer » Mon Oct 14, 2019 8:01 pm

newpup wrote:
Mon Oct 14, 2019 6:20 pm
Mel Lindauer wrote:
Mon Oct 14, 2019 6:07 pm
One possible problem with your plan.

If the children are younger than college age, the I bonds could be used tax-free for qualifying educational expenses, but NOT if they're listed as a co-owner.

However, they could be listed as the beneficiary and the bonds could then be used for their qualifying educational expenses.
Thanks Mel. My income is above the phaseout threshold and my primary interest is gifting to my kids to lessen any potential future estate tax burden while maintaining the ability to "claw back" gifts if my finances go south for some reason. Do you think co-ownership makes more sense in my situation?
Given the fact that you're above the threshold, your plan makes sense.
Best Regards - Mel | | Semper Fi

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whodidntante
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Re: I-bonds with kids

Post by whodidntante » Mon Oct 14, 2019 8:23 pm

As co-owners, what's to stop your kids from redeeming them regardless of what you want?

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newpup
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Re: I-bonds with kids

Post by newpup » Mon Oct 14, 2019 9:16 pm

whodidntante wrote:
Mon Oct 14, 2019 8:23 pm
As co-owners, what's to stop your kids from redeeming them regardless of what you want?
Not telling them about Treasury Direct...until they’re 45! Mwahahahahahaha!
(Cue lightning bolts and screeching bats)
Last edited by newpup on Mon Oct 14, 2019 9:23 pm, edited 1 time in total.

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whodidntante
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Re: I-bonds with kids

Post by whodidntante » Mon Oct 14, 2019 10:00 pm

newpup wrote:
Mon Oct 14, 2019 9:16 pm
whodidntante wrote:
Mon Oct 14, 2019 8:23 pm
As co-owners, what's to stop your kids from redeeming them regardless of what you want?
Not telling them about Treasury Direct...until they’re 45! Mwahahahahahaha!
(Cue lightning bolts and screeching bats)
By the age of 45, your kids should have developed most of the emotional maturity required to use Treasury Direct. But they won't like their bio-enhancement implants and will yearn for the smooth, simple times of Windows 10.

nydoc
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Re: I-bonds with kids

Post by nydoc » Tue Oct 15, 2019 7:27 am

Will this purchase be counted against annual gift limit to your children?

DrCheese
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Re: I-bonds with kids

Post by DrCheese » Tue Oct 15, 2019 7:28 am

newpup wrote:
Mon Oct 14, 2019 9:16 pm
whodidntante wrote:
Mon Oct 14, 2019 8:23 pm
As co-owners, what's to stop your kids from redeeming them regardless of what you want?
Not telling them about Treasury Direct...until they’re 45! Mwahahahahahaha!
(Cue lightning bolts and screeching bats)
See that is one of my biggest fears. That I die and no one knows that I have a Treasury Direct account as they send out no mail.

fujiters
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Re: I-bonds with kids

Post by fujiters » Tue Oct 15, 2019 1:54 pm

DrCheese wrote:
Tue Oct 15, 2019 7:28 am
newpup wrote:
Mon Oct 14, 2019 9:16 pm
whodidntante wrote:
Mon Oct 14, 2019 8:23 pm
As co-owners, what's to stop your kids from redeeming them regardless of what you want?
Not telling them about Treasury Direct...until they’re 45! Mwahahahahahaha!
(Cue lightning bolts and screeching bats)
See that is one of my biggest fears. That I die and no one knows that I have a Treasury Direct account as they send out no mail.
I have this fear as well. I mitigate it by printing an annual spreadsheet of financial holdings broken down by account, which is kept in a safe in my home. It might be 11 months out of date when it's needed, but at least the heirs will know the TD accounts exist (along with all other accounts) and approximately how much to expect is in them.
“The purpose of the margin of safety is to render the forecast unnecessary.” -Benjamin Graham

fujiters
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Re: I-bonds with kids

Post by fujiters » Tue Oct 15, 2019 1:58 pm

Sounds like a fine plan. Why not also EE bonds for the 3.5% rate over 20 years (due to the doubling at year 20)?
“The purpose of the margin of safety is to render the forecast unnecessary.” -Benjamin Graham

STAR_Fund_4_Life
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Re: I-bonds with kids

Post by STAR_Fund_4_Life » Tue Oct 15, 2019 2:06 pm

DrCheese wrote:
Tue Oct 15, 2019 7:28 am
newpup wrote:
Mon Oct 14, 2019 9:16 pm
whodidntante wrote:
Mon Oct 14, 2019 8:23 pm
As co-owners, what's to stop your kids from redeeming them regardless of what you want?
Not telling them about Treasury Direct...until they’re 45! Mwahahahahahaha!
(Cue lightning bolts and screeching bats)
See that is one of my biggest fears. That I die and no one knows that I have a Treasury Direct account as they send out no mail.
I've thought about this as well. I need to prepare emergency packets to give to a couple of family members in event of my death or incapacitation and that needs to be part of it. The other option would be to just buy paper bonds once a year with tax return, but that option might not last forever.

bornloser
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Re: I-bonds with kids

Post by bornloser » Tue Oct 15, 2019 4:23 pm

Re. I bonds purchased with a minor as co-owner thereby enabling a work around of the 10k limit per person. I did not know this and I'm surprised I haven't seen this strategy before. I know some have posted putting I bonds in a trust.

Topic Author
newpup
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Re: I-bonds with kids

Post by newpup » Tue Oct 15, 2019 4:37 pm

nydoc wrote:
Tue Oct 15, 2019 7:27 am
Will this purchase be counted against annual gift limit to your children?
Yes- counted against annual gift limit of $15,000 per child per parent. If cash flow were not a limiter, my wife and I could each gift $10,000 in I-bonds and $5,000 in EE bonds to each child each year.
fujiters wrote:
Tue Oct 15, 2019 1:58 pm
Sounds like a fine plan. Why not also EE bonds for the 3.5% rate over 20 years (due to the doubling at year 20)?
I prefer I-bond co-registration because I can cash them in myself if necessary, say in financial distress, illness, or if the kids go off the rails and could not handle access to savings short of the 20 year mark. EE bonds are miserable if you can't commit to the full 20 years. If all goes swimmingly, I've reduced my estate and they can cash them in at low tax rates.

Topic Author
newpup
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Re: I-bonds with kids

Post by newpup » Wed Oct 16, 2019 12:22 pm

bornloser wrote:
Tue Oct 15, 2019 4:23 pm
Re. I bonds purchased with a minor as co-owner thereby enabling a work around of the 10k limit per person. I did not know this and I'm surprised I haven't seen this strategy before. I know some have posted putting I bonds in a trust.
What is the limit on co-registration? Am I able to buy 10k of I bonds in my own name AND 10k co-registered with my child? I would think it would only be 10k total with my name on it in any capacity.

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Darth Xanadu
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Re: I-bonds with kids

Post by Darth Xanadu » Wed Oct 16, 2019 12:33 pm

DrCheese wrote:
Tue Oct 15, 2019 7:28 am
newpup wrote:
Mon Oct 14, 2019 9:16 pm
whodidntante wrote:
Mon Oct 14, 2019 8:23 pm
As co-owners, what's to stop your kids from redeeming them regardless of what you want?
Not telling them about Treasury Direct...until they’re 45! Mwahahahahahaha!
(Cue lightning bolts and screeching bats)
See that is one of my biggest fears. That I die and no one knows that I have a Treasury Direct account as they send out no mail.
I wouldn't rely on mail trickling in after my death to alert my heirs to what accounts I have with whom.

Personally, I've already made my prospective executors aware of this information, including the existence of my Treasury Direct account.
"A courageous teacher, failure is."

majiaknight
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Re: I-bonds with kids

Post by majiaknight » Fri Oct 18, 2019 12:05 am

newpup wrote:
Mon Oct 14, 2019 5:14 pm
...If I need the cash, I can redeem the bonds. If I never need them, I can let my kids redeem them in 5-30 years, likely at a lower income tax rate (mine is 37% federal). Am I missing something with this plan?
Do you mean the "lower income tax rate" of your kids? If yes, then you might be wrong. Since you pay the money to buy the bond, you will also be responsible for the taxes no matter who cashes it out.

Check the "Table 1-2. Who Pays the Tax on U.S. Savings Bond Interest" and the texts in the IRS Pub 550 below.
https://www.irs.gov/publications/p550
Co-owners.
If a U.S. savings bond is issued in the names of co-owners, such as you and your child or you and your spouse, interest on the bond generally is taxable to the co-owner who bought the bond.

One co-owner's funds used.
If you used your funds to buy the bond, you must pay the tax on the interest. This is true even if you let the other co-owner redeem the bond and keep all the proceeds. Under these circumstances, the co-owner who redeemed the bond will receive a Form 1099-INT at the time of redemption and must provide you with another Form 1099-INT showing the amount of interest from the bond taxable to you. The co-owner who redeemed the bond is a "nominee." See Nominee distributions , later, for more information about how a person who is a nominee reports interest income belonging to another person.

majiaknight
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Re: I-bonds with kids

Post by majiaknight » Fri Oct 18, 2019 12:24 am

newpup wrote:
Tue Oct 15, 2019 4:37 pm
nydoc wrote:
Tue Oct 15, 2019 7:27 am
Will this purchase be counted against annual gift limit to your children?
Yes- counted against annual gift limit of $15,000 per child per parent. If cash flow were not a limiter, my wife and I could each gift $10,000 in I-bonds and $5,000 in EE bonds to each child each year.
This has to be further verified by looking into the IRS docs. I've seen other online post below saying that for the savings bond co-ownership it won't count towards annual gift limit at purchase since the parents as co-owner could also cash the bond by themselves w/o benefiting the kids. So, it seems that only when it is redeemed you can tell whether it is considered as gift or not.
Please check the discussion on this post: https://forum.savingforcollege.com/t/sa ... ons/6924/5

There are no gift consequences until and unless the other co-owner cashes the bonds and keeps the proceeds. So if you cash the bond yourself there never was a gift. Same as putting another person's name on your bank account.

When the bond is cashed, the 1099 will go to the ss# on the bond. If that is your child, since you are responsible for paying the tax, since you are responsible for the interest (since your furnished 100% of the money for the bond), your child will have to "nominate" the interest back to you (report it on his/her tax return and then subtract the amount back off under "nominee interest.") Technically the child should actually issue you a 1099-INT, and send a copy to the IRS. I did this one year and there is some work involved so it's a pain. There are instructions somewhere on how to do this. I can't remember where, but maybe Pub 550.

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