Buying I Bonds for Children

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Fordguy88
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Buying I Bonds for Children

Post by Fordguy88 »

I purchase 20K a year for my wife and I In I Bonds. (Will look at tax return next year to convert to I bonds)

I have two children ages 2 and 4. The Treasury Direct website says I can gift them 10K each per year as long as they’re linked to my Treasury account. Is it still just the 12 month minimum holding time for them as well?

Am I missing anything here? With my wife and kids I could effectively purchase 40k in I bonds per year? I know this would basically be a puppet scenario with my kids but it is what it is.

Thanks,
Fordguy88
Grt2bOutdoors
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Re: Buying I Bonds for Children

Post by Grt2bOutdoors »

You aren’t buying $40k, you are buying $20k for you and spouse. The other $20k is broken into a $10k completed gift to each of your children. Yes, they are subject to a 12 month minimum holding period. Also, if you cash them out at any time after 12 months, a message box appears on the screen telling you that “ you understand and acknowledge that proceeds of the redemption will be for the benefit of the child and not you”. Essentially the child’s account is considered a UTMA account by the Treasury department. (Ask me how I know).
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lakpr
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Re: Buying I Bonds for Children

Post by lakpr »

As had been pointed out in another thread, if you are buying I bonds in the names of your children, you are essentially buying them investments that are guaranteed to lose to inflation (after taxes are paid)?

With children so young, if you DO intend to make gifts to them $10k each, put them in a UTMA brokerage account and invest in total stock market index. They have at least 14 and 16 years time horizon even if you intend this money to be used for their education expenses and not and outright gift. Better yet, stick that money in a 529 plan, where it is technically for the benefit of the child but deemed a parental asset and not the child's. You are still subject to the annual gift tax rules ($15k per year without having to report, or front load 5 years worth $75k at once, over those limits just file Form 709).
ShoestringFiddle
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Re: Buying I Bonds for Children

Post by ShoestringFiddle »

@Grt2bOutdoors
Grt2bOutdoors wrote: Sun Jul 25, 2021 7:46 am ...Essentially the child’s account is considered a UTMA account by the Treasury department. (Ask me how I know).
Please do tell. I'm genuinely curious what happened. Thanks in advance.
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Re: Buying I Bonds for Children

Post by Grt2bOutdoors »

ShoestringFiddle wrote: Mon Dec 13, 2021 12:17 pm @Grt2bOutdoors
Grt2bOutdoors wrote: Sun Jul 25, 2021 7:46 am ...Essentially the child’s account is considered a UTMA account by the Treasury department. (Ask me how I know).
Please do tell. I'm genuinely curious what happened. Thanks in advance.
Nothing happened. It's considered a UTMA account, the control of the account reverts to the child at age 18 whether you want it or not. If you purchase an I bond for the child before the age of 18, let's say you either find a more suitable investment that is outside of Treasury Direct or the child needs the cash for a special trip, etc. When you go to redeem the bond, a special message will appear on the screen, basically re-informing the custodian that the money belongs to the child and should only be used on behalf of the child. So for those who think they will open a Treasury Direct account in the name of the child with money that is not intended as a completed gift for the child, that screen window is directed at them. It's the child's money, not yours.
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Re: Buying I Bonds for Children

Post by z3r0c00l »

lakpr wrote: Sun Jul 25, 2021 8:03 am As had been pointed out in another thread, if you are buying I bonds in the names of your children, you are essentially buying them investments that are guaranteed to lose to inflation (after taxes are paid)?
That this is by far the best safe investment available to most of us is merely a comment on the sad state of safe investments these days. I would tend to agree that stocks are almost certainly going to do better over the next 20 years.
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Re: Buying I Bonds for Children

Post by Mel Lindauer »

z3r0c00l wrote: Mon Dec 13, 2021 4:28 pm
lakpr wrote: Sun Jul 25, 2021 8:03 am As had been pointed out in another thread, if you are buying I bonds in the names of your children, you are essentially buying them investments that are guaranteed to lose to inflation (after taxes are paid)?
That this is by far the best safe investment available to most of us is merely a comment on the sad state of safe investments these days. I would tend to agree that stocks are almost certainly going to do better over the next 20 years.
I Bonds are for the bond part of your asset allocation and stocks are for the equity part. Don't think of the two as being interchangeable once you've settled on your asset allocation. I Bonds should be compared to other cash and bond options, not equities.
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Re: Buying I Bonds for Children

Post by z3r0c00l »

Mel Lindauer wrote: Mon Dec 13, 2021 5:09 pm
z3r0c00l wrote: Mon Dec 13, 2021 4:28 pm
lakpr wrote: Sun Jul 25, 2021 8:03 am As had been pointed out in another thread, if you are buying I bonds in the names of your children, you are essentially buying them investments that are guaranteed to lose to inflation (after taxes are paid)?
That this is by far the best safe investment available to most of us is merely a comment on the sad state of safe investments these days. I would tend to agree that stocks are almost certainly going to do better over the next 20 years.
I Bonds are for the bond part of your asset allocation and stocks are for the equity part. Don't think of the two as being interchangeable once you've settled on your asset allocation. I Bonds should be compared to other cash and bond options, not equities.
But for a 20 year investing window, I think one has to seriously consider stocks. And I don't see the children of the OP using I bonds before they are 18+ so in this scenario stocks are a valid option.
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Re: Buying I Bonds for Children

Post by Mel Lindauer »

z3r0c00l wrote: Mon Dec 13, 2021 7:04 pm
Mel Lindauer wrote: Mon Dec 13, 2021 5:09 pm
z3r0c00l wrote: Mon Dec 13, 2021 4:28 pm
lakpr wrote: Sun Jul 25, 2021 8:03 am As had been pointed out in another thread, if you are buying I bonds in the names of your children, you are essentially buying them investments that are guaranteed to lose to inflation (after taxes are paid)?
That this is by far the best safe investment available to most of us is merely a comment on the sad state of safe investments these days. I would tend to agree that stocks are almost certainly going to do better over the next 20 years.
I Bonds are for the bond part of your asset allocation and stocks are for the equity part. Don't think of the two as being interchangeable once you've settled on your asset allocation. I Bonds should be compared to other cash and bond options, not equities.
But for a 20 year investing window, I think one has to seriously consider stocks. And I don't see the children of the OP using I bonds before they are 18+ so in this scenario stocks are a valid option.
That's certainly a valid consideration. But in general, for most investors, I Bonds should be considered as part of the bond portion of their desired asset allocation. They are two different animals. The I Bonds would be the "safe" part of their portfolio while the equities would be the "risk with expected long-term reward" portion.
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Re: Buying I Bonds for Children

Post by TropikThunder »

z3r0c00l wrote: Mon Dec 13, 2021 7:04 pm But for a 20 year investing window, I think one has to seriously consider stocks. And I don't see the children of the OP using I bonds before they are 18+ so in this scenario stocks are a valid option.
That’s an asset allocation question, not a “what fixed income should I use” question. I agree, for a 20 year timeline stocks would be better than bonds - but that’s an argument against all bonds, not specifically against I bonds.
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Re: Buying I Bonds for Children

Post by TropikThunder »

lakpr wrote: Sun Jul 25, 2021 8:03 am As had been pointed out in another thread, if you are buying I bonds in the names of your children, you are essentially buying them investments that are guaranteed to lose to inflation (after taxes are paid)?
Why do people keep saying that? It’s like people think the rate I bonds are set at determines what inflation will actually be with no margin of error. Treasury makes an estimate of what inflation will be based on what it just was. That doesn’t mean they are right, and it doesn’t mean they are “guaranteed to lose to inflation”.
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Re: Buying I Bonds for Children

Post by z3r0c00l »

TropikThunder wrote: Mon Dec 13, 2021 8:18 pm
z3r0c00l wrote: Mon Dec 13, 2021 7:04 pm But for a 20 year investing window, I think one has to seriously consider stocks. And I don't see the children of the OP using I bonds before they are 18+ so in this scenario stocks are a valid option.
That’s an asset allocation question, not a “what fixed income should I use” question. I agree, for a 20 year timeline stocks would be better than bonds - but that’s an argument against all bonds, not specifically against I bonds.
Right, the OP was asking about buying I bonds for young children and another person up-thread basically said that with such a long horizon, stocks work better. I agree with that idea.
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Re: Buying I Bonds for Children

Post by dukeblue219 »

Anyone want to take a crack at the college tuition implications of this? FAFSA probably isn't a huge concern if you can afford $40k in bonds per year, but the kids' own I bonds would be fully taxable if used for college, right?

If the bonds aren't part of a college plan then I struggle to understand why a 2 year old needs any bonds at all given the time the child has for growth.
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Re: Buying I Bonds for Children

Post by ivgrivchuck »

Fordguy88 wrote: Sun Jul 25, 2021 7:35 am I purchase 20K a year for my wife and I In I Bonds. (Will look at tax return next year to convert to I bonds)

I have two children ages 2 and 4. The Treasury Direct website says I can gift them 10K each per year as long as they’re linked to my Treasury account. Is it still just the 12 month minimum holding time for them as well?

Am I missing anything here? With my wife and kids I could effectively purchase 40k in I bonds per year? I know this would basically be a puppet scenario with my kids but it is what it is.

Thanks,
Fordguy88
You are not missing anything. I'm doing exactly that. It's a solid investment. The money is intended for their college expenses.

Because their college expenses are now better covered, that enables me to be more aggressive with my own portfolio.

But as others have pointed out, after you gift money to your children, you can't take it back...
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Re: Buying I Bonds for Children

Post by SnowBog »

TropikThunder wrote: Mon Dec 13, 2021 8:23 pm
lakpr wrote: Sun Jul 25, 2021 8:03 am As had been pointed out in another thread, if you are buying I bonds in the names of your children, you are essentially buying them investments that are guaranteed to lose to inflation (after taxes are paid)?
Why do people keep saying that? It’s like people think the rate I bonds are set at determines what inflation will actually be with no margin of error. Treasury makes an estimate of what inflation will be based on what it just was. That doesn’t mean they are right, and it doesn’t mean they are “guaranteed to lose to inflation”.
The working premise is that they will [roughly] match inflation (or as close as one can get). The "lose to inflation" had a very specific part noted "after taxes are paid". Thus - unless your tax rate is 0% (including if you qualify for tax-free education redemption) - you are losing to inflation by your tax rate (at least with current 0% "fixed" I Bonds).

Now - compared with other "cash" like options - that's still far better then you'll find elsewhere! And compared with other bonds - it may well end up being better - as other bonds will lose "value" as inflation/interest rates increase.
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Re: Buying I Bonds for Children

Post by SnowBog »

ivgrivchuck wrote: Mon Dec 13, 2021 8:43 pm
Fordguy88 wrote: Sun Jul 25, 2021 7:35 am I purchase 20K a year for my wife and I In I Bonds. (Will look at tax return next year to convert to I bonds)

I have two children ages 2 and 4. The Treasury Direct website says I can gift them 10K each per year as long as they’re linked to my Treasury account. Is it still just the 12 month minimum holding time for them as well?

Am I missing anything here? With my wife and kids I could effectively purchase 40k in I bonds per year? I know this would basically be a puppet scenario with my kids but it is what it is.

Thanks,
Fordguy88
You are not missing anything. I'm doing exactly that. It's a solid investment. The money is intended for their college expenses.

Because their college expenses are now better covered, that enables me to be more aggressive with my own portfolio.

But as others have pointed out, after you gift money to your children, you can't take it back...
As a reminder, if you would (or could) otherwise qualify for tax-free redemption for education expenses - you are better off holding I Bonds in one (or both) of the parents names. I Bonds held in the kids names are not eligible for tax-free education usage. https://www.treasurydirect.gov/indiv/pl ... cation.htm
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Re: Buying I Bonds for Children

Post by SnowBog »

OP - if the intent is to by an "extra" $20k for you/spouse - you should not be purchasing in your children's names. As has been noted, once you've done so - it is considered an irrevocable gift to the children - and should be treated as such.

You do have other options to purchase more than $10k/year:
  • Year-end timing, you can buy $10k/each now and another $10k/each in January - since the $10k "resets" on Jan. 1 of each year
  • If you have trust(s) and/or business(es) - you can create account(s) for those and purchase in them
  • You can get an extra $5k via tax refunds
  • You can effectively "front-load" extra I Bond purchases by buying "gifts" from/for spouses - and then delivering up to $10k year (note the $10k limit is across "buying" for yourself and "receiving" as gift, so if you front-load say $50k - it will take 5 years to "deliver" all the gifts - meaning your money is "locked up" longer. viewtopic.php?f=1&t=306297&start=50
For ourselves, we buy $45k a year between 2x individual accounts, 2x "living trust" (aka entity) accounts, and $5k tax refund.

I did move our child's "cash" from birthday/holiday/etc. money they've saved into I Bonds. While it's a small amount, the 7.12% rate is significantly more than the 0.3% they were getting - enough so sold after 1 year - they'd still be many years ahead. But this money is "their" money - it will either remain in I Bonds in their account, go back into their "savings" account, or end up in their UTMA [and invested in something]. I would never put the money back into my accounts [unless I was reimbursing myself for an optional expense for their benefit - such as a class trip].
Last edited by SnowBog on Mon Dec 13, 2021 8:59 pm, edited 1 time in total.
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Re: Buying I Bonds for Children

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lakpr wrote: Sun Jul 25, 2021 8:03 am As had been pointed out in another thread, if you are buying I bonds in the names of your children, you are essentially buying them investments that are guaranteed to lose to inflation (after taxes are paid)?

With children so young, if you DO intend to make gifts to them $10k each, put them in a UTMA brokerage account and invest in total stock market index. They have at least 14 and 16 years time horizon even if you intend this money to be used for their education expenses and not and outright gift. Better yet, stick that money in a 529 plan, where it is technically for the benefit of the child but deemed a parental asset and not the child's. You are still subject to the annual gift tax rules ($15k per year without having to report, or front load 5 years worth $75k at once, over those limits just file Form 709).
:thumbsup

I entirely agree. Kids should own stocks, not bonds.
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Re: Buying I Bonds for Children

Post by SnowBog »

willthrill81 wrote: Mon Dec 13, 2021 8:58 pm
lakpr wrote: Sun Jul 25, 2021 8:03 am As had been pointed out in another thread, if you are buying I bonds in the names of your children, you are essentially buying them investments that are guaranteed to lose to inflation (after taxes are paid)?

With children so young, if you DO intend to make gifts to them $10k each, put them in a UTMA brokerage account and invest in total stock market index. They have at least 14 and 16 years time horizon even if you intend this money to be used for their education expenses and not and outright gift. Better yet, stick that money in a 529 plan, where it is technically for the benefit of the child but deemed a parental asset and not the child's. You are still subject to the annual gift tax rules ($15k per year without having to report, or front load 5 years worth $75k at once, over those limits just file Form 709).
:thumbsup

I entirely agree. Kids should own stocks, not bonds.
I don't think it needs to be mutually exclusive...

My child has a small "savings" account - most of which I just moved into I Bonds.

They also have a 529 and UTMA account, which are invested in stocks.

When they are old enough to work, I'm hoping they'll learn to save some money in their "savings" account for near term needs and move the rest into long term investments (likely setup a Fidelity Youth Account - since most of our accounts are there anyway) such as a total stock market fund.
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Re: Buying I Bonds for Children

Post by ivgrivchuck »

SnowBog wrote: Mon Dec 13, 2021 8:47 pm As a reminder, if you would (or could) otherwise qualify for tax-free redemption for education expenses - you are better off holding I Bonds in one (or both) of the parents names. I Bonds held in the kids names are not eligible for tax-free education usage. https://www.treasurydirect.gov/indiv/pl ... cation.htm
One can report the interest annually in child's tax return. And as long as the interest amount stays under the kiddie tax limit, the interest is tax free for *any* purpose.
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Re: Buying I Bonds for Children

Post by SnowBog »

ivgrivchuck wrote: Mon Dec 13, 2021 9:10 pm
SnowBog wrote: Mon Dec 13, 2021 8:47 pm As a reminder, if you would (or could) otherwise qualify for tax-free redemption for education expenses - you are better off holding I Bonds in one (or both) of the parents names. I Bonds held in the kids names are not eligible for tax-free education usage. https://www.treasurydirect.gov/indiv/pl ... cation.htm
One can report the interest annually in child's tax return. And as long as the interest amount stays under the kiddie tax limit, the interest is tax free for *any* purpose.
I'm filling up the kiddie tax limit with TGH in the UTMA, so it wouldn't have occurred to me...

But it's a great point!
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Re: Buying I Bonds for Children

Post by willthrill81 »

SnowBog wrote: Mon Dec 13, 2021 9:04 pm
willthrill81 wrote: Mon Dec 13, 2021 8:58 pm
lakpr wrote: Sun Jul 25, 2021 8:03 am As had been pointed out in another thread, if you are buying I bonds in the names of your children, you are essentially buying them investments that are guaranteed to lose to inflation (after taxes are paid)?

With children so young, if you DO intend to make gifts to them $10k each, put them in a UTMA brokerage account and invest in total stock market index. They have at least 14 and 16 years time horizon even if you intend this money to be used for their education expenses and not and outright gift. Better yet, stick that money in a 529 plan, where it is technically for the benefit of the child but deemed a parental asset and not the child's. You are still subject to the annual gift tax rules ($15k per year without having to report, or front load 5 years worth $75k at once, over those limits just file Form 709).
:thumbsup

I entirely agree. Kids should own stocks, not bonds.
I don't think it needs to be mutually exclusive...

My child has a small "savings" account - most of which I just moved into I Bonds.

They also have a 529 and UTMA account, which are invested in stocks.

When they are old enough to work, I'm hoping they'll learn to save some money in their "savings" account for near term needs and move the rest into long term investments (likely setup a Fidelity Youth Account - since most of our accounts are there anyway) such as a total stock market fund.
20+ year investment horizons with no intervening withdrawals = 100% stock
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Re: Buying I Bonds for Children

Post by SnowBog »

willthrill81 wrote: Mon Dec 13, 2021 9:22 pm 20+ year investment horizons with no intervening withdrawals = 100% stock
We encourage our child, and will continue to do so as they "earn" money, to save, spend, and invest the money.

I'm less concerned that they end up with as much money as possible (as they amounts they have aren't meaningful anyway).

I'm more concerned they start to grasp good financial concepts, like "live below your means", "save for what you want", and "save for the future".
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Re: Buying I Bonds for Children

Post by willthrill81 »

SnowBog wrote: Mon Dec 13, 2021 9:28 pm
willthrill81 wrote: Mon Dec 13, 2021 9:22 pm 20+ year investment horizons with no intervening withdrawals = 100% stock
We encourage our child, and will continue to do so as they "earn" money, to save, spend, and invest the money.

I'm less concerned that they end up with as much money as possible (as they amounts they have aren't meaningful anyway).

I'm more concerned they start to grasp good financial concepts, like "live below your means", "save for what you want", and "save for the future".
They can do all that while investing in stocks. Owning bonds at a young age doesn't help in any meaningful way that I can see.

In fact, a good argument can be made to be 100% stocks until one is around 10 years from retirement.
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Re: Buying I Bonds for Children

Post by SnowBog »

willthrill81 wrote: Mon Dec 13, 2021 9:35 pm
SnowBog wrote: Mon Dec 13, 2021 9:28 pm
willthrill81 wrote: Mon Dec 13, 2021 9:22 pm 20+ year investment horizons with no intervening withdrawals = 100% stock
We encourage our child, and will continue to do so as they "earn" money, to save, spend, and invest the money.

I'm less concerned that they end up with as much money as possible (as they amounts they have aren't meaningful anyway).

I'm more concerned they start to grasp good financial concepts, like "live below your means", "save for what you want", and "save for the future".
They can do all that while investing in stocks. Owning bonds at a young age doesn't help in any meaningful way that I can see.

In fact, a good argument can be made to be 100% stocks until one is around 10 years from retirement.
Well, maybe we are splitting hairs...

Yes, technically I Bonds are "bonds"... And in a general sense, I agree most kids don't have a need for "bonds" from an "investment" sense. They literally have the time to ride out the storm...

But I think kids have needs for "cash" accounts (checking/savings). And I think the nature of I Bonds is they are very "cash like" (beyond their initial 1-year lock up period), in that they aren't marketable, and simply have interest added to the account monthly. So instead of leaving "cash" sitting in a savings account earning 0.3% in a "child's" account - it could be invested in I Bonds - currently earning 7.12%. In just the first 6 months - this will earn more than 12 years sitting at 0.3%. Assuming a 2% rate for the next 6 months, it would earn more than 15 years at 0.3%. So, for the small "cash" balance my child has, I Bonds seem like a vastly better option right now than a "savings" account.

In a similar notion, I think this is why people often use I Bonds as part of (or full as) their "emergency fund" - which previously for most people was entirely cash. Even those who otherwise say their AA is 100/0 (as they exclude their EF). Again, technically I Bonds are "bonds" - but I think the usage is more "cash" like vs. "bonds" in an investment sense...
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Re: Buying I Bonds for Children

Post by evelynmanley »

A recent article by Harry Sit. "Buy I Bonds in Your Kid's Name: You Can, But Should You?"

https://thefinancebuff.com/buy-i-bonds-kids-name.html
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Re: Buying I Bonds for Children

Post by Grt2bOutdoors »

willthrill81 wrote: Mon Dec 13, 2021 8:58 pm
lakpr wrote: Sun Jul 25, 2021 8:03 am As had been pointed out in another thread, if you are buying I bonds in the names of your children, you are essentially buying them investments that are guaranteed to lose to inflation (after taxes are paid)?

With children so young, if you DO intend to make gifts to them $10k each, put them in a UTMA brokerage account and invest in total stock market index. They have at least 14 and 16 years time horizon even if you intend this money to be used for their education expenses and not and outright gift. Better yet, stick that money in a 529 plan, where it is technically for the benefit of the child but deemed a parental asset and not the child's. You are still subject to the annual gift tax rules ($15k per year without having to report, or front load 5 years worth $75k at once, over those limits just file Form 709).
:thumbsup

I entirely agree. Kids should own stocks, not bonds.
All depends on ones station in life. That’s why it’s personal finance. In 2008, the financial system worldwide nearly collapsed, lots of folks were thrown out of work and had saner minds not prevailed we would all be singing a different tune today. Hypothetically equities are the optimal investment but I doubt many were buying stock if they were on or close to walking the unemployment line.
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Re: Buying I Bonds for Children

Post by Tigranes »

We bought 10k a year per kid for 4 years for college. Prefer no risk for known expense. Would suck for a major recession to hit, you lose your job and watch your kids college fund disappear. If market keeps going up up up we'll still be worth millions and it won't matter that some funds only kept up with inflation.
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Re: Buying I Bonds for Children

Post by willthrill81 »

Grt2bOutdoors wrote: Thu Dec 16, 2021 9:40 am
willthrill81 wrote: Mon Dec 13, 2021 8:58 pm
lakpr wrote: Sun Jul 25, 2021 8:03 am As had been pointed out in another thread, if you are buying I bonds in the names of your children, you are essentially buying them investments that are guaranteed to lose to inflation (after taxes are paid)?

With children so young, if you DO intend to make gifts to them $10k each, put them in a UTMA brokerage account and invest in total stock market index. They have at least 14 and 16 years time horizon even if you intend this money to be used for their education expenses and not and outright gift. Better yet, stick that money in a 529 plan, where it is technically for the benefit of the child but deemed a parental asset and not the child's. You are still subject to the annual gift tax rules ($15k per year without having to report, or front load 5 years worth $75k at once, over those limits just file Form 709).
:thumbsup

I entirely agree. Kids should own stocks, not bonds.
All depends on ones station in life. That’s why it’s personal finance. In 2008, the financial system worldwide nearly collapsed, lots of folks were thrown out of work and had saner minds not prevailed we would all be singing a different tune today. Hypothetically equities are the optimal investment but I doubt many were buying stock if they were on or close to walking the unemployment line.
I get your point, but kids aren't typically employed until their late teen years at the earliest and are not dependent on their portfolio. Parents should not be buying stocks, bonds, or anything else for their children until their own financial position is secure enough to allow them to prudently do so. You need to put on your own oxygen mask before assisting others.
The Sensible Steward
bigbadlamer
Posts: 1
Joined: Wed Apr 13, 2022 12:17 pm

Re: Buying I Bonds for Children

Post by bigbadlamer »

SnowBog wrote: Mon Dec 13, 2021 8:55 pm
I would never put the money back into my accounts [unless I was reimbursing myself for an optional expense for their benefit - such as a class trip].
In a similar vein, could one use for things like:

1) private schools

2) extracurriculars

3) down payment for a house?

It's just a little unclear if you *must* cash this account into an UTMA or may do it into your own account for the aforementioned expenses.
SnowBog
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Re: Buying I Bonds for Children

Post by SnowBog »

bigbadlamer wrote: Wed Apr 13, 2022 1:01 pm
SnowBog wrote: Mon Dec 13, 2021 8:55 pm
I would never put the money back into my accounts [unless I was reimbursing myself for an optional expense for their benefit - such as a class trip].
In a similar vein, could one use for things like:

1) private schools

2) extracurriculars

3) down payment for a house?

It's just a little unclear if you *must* cash this account into an UTMA or may do it into your own account for the aforementioned expenses.
IANAL nor an expert on this... But my understanding is the intent is that the money is the child's money, and shouldn't be spent on things other than for the child's benefit. I have that same understanding of a UTMA as well...

"Technically" - I don't think the money has to flow into a UTMA. Even from a UTMA, I think you could "write yourself a check" to re-imburse for valid expenses. So I'm less concerned about the mechanics...

I'm thinking more from an audit perspective... Can I show that I meet the intent? If I cashed in $5000 of my child's I Bonds (and/or UTMA) and had no documentation on "what" that was used for - I don't think you've done your job... But if I kept recipients showing what I believed to be a valid expense for the child's direct benefit (I'm not sure buying me a new boat would be considered for their benefit) of $5000, then I don't see why that should be a problem.

That said, I wouldn't personally do #3... I can't imagine any minors buying a house... Once the child turns 18, arguably you should no longer do anything with their I Bonds, and I think TD may even cut off your access (I'll find out in a few years). Instead, the child should register for their own account. And they should be the ones redeeming them (or not), and ultimately dealing with any resulting taxes on interest earned. The same is true for UTMA - although I think the age may vary by state for when the child gets direct control.

Maybe a "grey" area - and one that will (or should) reveal itself with financial aid info for colleges - but perhaps some people don't "advertise" these assets to their kids. That lack of knowledge is the only thing preventing kids from draining these accounts when they are old enough. (And maybe any other influence from parents, like do so and ... happens.) Our goal is that our child will understand, not abuse, and thus be aware of these at the appropriate time. Our fallback, if they end up having substance abuse or mental health issues, will be to drain these accounts for things in the child's direct benefit before they get control - such that they wouldn't have access to funds they could misuse at that time.
Grt2bOutdoors
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Location: New York

Re: Buying I Bonds for Children

Post by Grt2bOutdoors »

bigbadlamer wrote: Wed Apr 13, 2022 1:01 pm
SnowBog wrote: Mon Dec 13, 2021 8:55 pm
I would never put the money back into my accounts [unless I was reimbursing myself for an optional expense for their benefit - such as a class trip].
In a similar vein, could one use for things like:

1) private schools

2) extracurriculars

3) down payment for a house?

It's just a little unclear if you *must* cash this account into an UTMA or may do it into your own account for the aforementioned expenses.
Let me share my experience with buying I bonds for kids - I bought my kid an I bond some time back, when rates went from 0% fixed rate to a positive fixed rate, I redeemed the I bond paying 0% fixed. The first thing Treasury Direct did was pop a notice up on the screen reminding me that the money belong to the child and was to be used for the benefit of the child. There is no Treasury Direct police checking where the funds went, in my case the funds came into my bank account and nearly immediately went back to the Treasury Direct account to buy those positive fixed rate I bonds, where they still remain today. In another instance, I redeemed some savings bonds for the child and purchased VTSAX with it - no one knocked on my door to see that the funds moved from TD to the brokerage UTMA account but if they did, I have the paper trail ready.

And yes, to all of the above - the money is the child's to be used for the benefit of the child for expenses or needs outside of normal parental duties or expectations.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Bama12
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Re: Buying I Bonds for Children

Post by Bama12 »

Why not buy VTI for them?

I have been buying VTI for my 18 yr since he was very young. He has a great start in life.
SnowBog
Posts: 3829
Joined: Fri Dec 21, 2018 10:21 pm

Re: Buying I Bonds for Children

Post by SnowBog »

Bama12 wrote: Wed Apr 13, 2022 6:03 pm Why not buy VTI for them?

I have been buying VTI for my 18 yr since he was very young. He has a great start in life.
Or buy both as one is able to.

My child has some "savings" - which I recently moved the bulk of that into I Bonds. Having that "emergency fund" of sorts is a concept I want them having and understanding ASAP. And something like I Bonds is better suited (IMHO) for those short-term needs...

But they also have a "youth" account - where they can start to "invest" money going forward - currently that's in SCHB (but same idea as VTI). When they have earned income, I'll help them get a Roth IRA setup - and will help them learn to invest a portion of all earnings as well. Those are for long-term needs...

We also have a 529 and UTMA - all invested in total stock fund(s) - obviously earmarked for college and/or "launch" expenses.
Bama12
Posts: 784
Joined: Fri Aug 30, 2019 11:48 pm

Re: Buying I Bonds for Children

Post by Bama12 »

SnowBog wrote: Wed Apr 13, 2022 6:18 pm
Bama12 wrote: Wed Apr 13, 2022 6:03 pm Why not buy VTI for them?

I have been buying VTI for my 18 yr since he was very young. He has a great start in life.
Or buy both as one is able to.

My child has some "savings" - which I recently moved the bulk of that into I Bonds. Having that "emergency fund" of sorts is a concept I want them having and understanding ASAP. And something like I Bonds is better suited (IMHO) for those short-term needs...

But they also have a "youth" account - where they can start to "invest" money going forward - currently that's in SCHB (but same idea as VTI). When they have earned income, I'll help them get a Roth IRA setup - and will help them learn to invest a portion of all earnings as well. Those are for long-term needs...

We also have a 529 and UTMA - all invested in total stock fund(s) - obviously earmarked for college and/or "launch" expenses.
Agree!
er999
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Joined: Wed Nov 05, 2008 10:00 am

Re: Buying I Bonds for Children

Post by er999 »

You have to use the I bonds for the child’s benefit (and can’t be baseline expenses like food or rent), something like private school tuition or summer camps. You also want to spend it before age 18 as afterwards it’s their money. It’s good for a short term goal of a few years — I’m using for private school savings. Make sure to declare the interest yearly on child tax returns and $1100 or so of interest is tax free yearly as at the child rate.
SnowBog
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Re: Buying I Bonds for Children

Post by SnowBog »

er999 wrote: Thu Apr 14, 2022 9:35 am You have to use the I bonds for the child’s benefit (and can’t be baseline expenses like food or rent), something like private school tuition or summer camps. You also want to spend it before age 18 as afterwards it’s their money. It’s good for a short term goal of a few years — I’m using for private school savings. Make sure to declare the interest yearly on child tax returns and $1100 or so of interest is tax free yearly as at the child rate.
Slight clarification. The $1100 above is not specific or exclusive to I Bonds, it covers any/all interest (and unqualified dividends) in their name (such as from child bank account, UTMA, I Bonds, etc.).

But the post is correct, it's generally advisable to use up the child's 0% tax rate - including "tax gain harvesting" - such that they have minimal (or at least less than if you did nothing) taxes owed later.

Search for "kiddie tax" for more info.
Johnny Thinwallet
Posts: 354
Joined: Wed Nov 21, 2012 5:07 pm

Re: Buying I Bonds for Children

Post by Johnny Thinwallet »

Bumping this thread up as I have some questions and clarifications. We are considering buying some I Bonds for my son, who is currently 4 (turning 5 this summer) and I'm just wanting to make sure it's fairly simple.

We currently have a Marcus savings account for him that holds around $2,400 cash. The bulk of this money was stimulus money from 2020 and 2021 that my wife and I agreed to set aside for him as cash that he could enjoy growing up and learning about money. A very small fraction of it is gifts from birthdays, Christmas, etc.

The purpose of this $2,400 is twofold: 1) use as a tool to learn about money while growing up, and 2) it would be his money to manage, save, invest, spend as a kid while learning about money growing up. Note that we have a 529 completely separate from this money that is earmarked for college so this $2,400 in cash is not intended to be used to pay for college.

The Marcus account earns roughly $1/month interest, and I'd like it to earn a little bit more for him. Given current I Bonds rates and his age, I figured it may not be a bad idea to take $2,000 of that cash and buy I Bonds with it in his SSN through a linked minor account. He's too young to have any concept of this money during the 12 month lockup period, and then the 5-year interest penalty period would expire when he's 9.

My thinking is we would leave around $400 in the Marcus account to help introduce him to basic money concepts in the next few years as he gets gifts, practices buying small toys as a learning tool, etc. And then when he's 9 or 10 - the point in which the $2,000 in I Bonds (plus earnings) could be redeemed w/out penalty - that it could be a good time to start introducing him to different ideas on what to do with the larger pot of I Bond money (redeem part, create a youth account and invest in stocks, spend a little, etc.). We fully intend that this is his money, and then he could start making his own decisions on it (with appropriate guidance, of course).

This also isn't necessarily intended on being "launch" money for him, though if he ultimately decides when he's a teenager to invest it in stocks and earmark some of this money for future stuff then that would be his prerogative. Additionally, barring unforeseen circumstances, I do not anticipate that he will be receiving large financial gifts as he grows up. Typical gifts for things like birthdays, Christmas, etc. would be in the hundreds of dollars per year, not thousands.

I understand that upon redemption of the I Bonds that the Treasury would issue a 1099 for interest in his SSN and we would have to file Form 8615 (kiddie tax). For my sanity, I would write out notes for myself and file them away on how to handle this (with the #1 note being to review if tax laws have changed regarding this). We are in Ohio, and while I know he would not owe state tax I'm not certain if we'd have to actually file a form.

Any thoughts on this? And anything I need to be aware of, particularly with the kiddie tax, Ohio state tax and any associated forms? I'm hoping to keep it simple, and I also want to make sure everything is done properly with regards to taxes and recognizing that this is HIS money.
dbr
Posts: 43804
Joined: Sun Mar 04, 2007 8:50 am

Re: Buying I Bonds for Children

Post by dbr »

Johnny Thinwallet wrote: Sun Apr 17, 2022 9:12 am
Any thoughts on this? And anything I need to be aware of, particularly with the kiddie tax, Ohio state tax and any associated forms? I'm hoping to keep it simple, and I also want to make sure everything is done properly with regards to taxes and recognizing that this is HIS money.
Probably the best way to do what you say is to skip the I bonds in this case. There really is no good reason to do this.
Johnny Thinwallet
Posts: 354
Joined: Wed Nov 21, 2012 5:07 pm

Re: Buying I Bonds for Children

Post by Johnny Thinwallet »

dbr wrote: Sun Apr 17, 2022 9:20 am
Johnny Thinwallet wrote: Sun Apr 17, 2022 9:12 am
Any thoughts on this? And anything I need to be aware of, particularly with the kiddie tax, Ohio state tax and any associated forms? I'm hoping to keep it simple, and I also want to make sure everything is done properly with regards to taxes and recognizing that this is HIS money.
Probably the best way to do what you say is to skip the I bonds in this case. There really is no good reason to do this.
I'm curious as to your reasoning here. Would you recommend buying stocks instead? Doing nothing and keeping it in cash? Or just that $2,000 isn't worth any of the additional paperwork/hassle?

For what it's worth, the money has been sitting in Marcus for the last 1-2 years because I wasn't sure if the additional paperwork/hassle was worth it for a small amount of money so I'm not opposed to simply keeping things the same.
dbr
Posts: 43804
Joined: Sun Mar 04, 2007 8:50 am

Re: Buying I Bonds for Children

Post by dbr »

Johnny Thinwallet wrote: Sun Apr 17, 2022 10:21 am
dbr wrote: Sun Apr 17, 2022 9:20 am
Johnny Thinwallet wrote: Sun Apr 17, 2022 9:12 am
Any thoughts on this? And anything I need to be aware of, particularly with the kiddie tax, Ohio state tax and any associated forms? I'm hoping to keep it simple, and I also want to make sure everything is done properly with regards to taxes and recognizing that this is HIS money.
Probably the best way to do what you say is to skip the I bonds in this case. There really is no good reason to do this.
I'm curious as to your reasoning here. Would you recommend buying stocks instead? Doing nothing and keeping it in cash? Or just that $2,000 isn't worth any of the additional paperwork/hassle?

For what it's worth, the money has been sitting in Marcus for the last 1-2 years because I wasn't sure if the additional paperwork/hassle was worth it for a small amount of money so I'm not opposed to simply keeping things the same.
The reasoning is based on the small amount of money and the minimal benefit of I bonds compared to other things. Usually the obvious choice for a starter investment for a child is a stock fund such as VTI which promises long term growth for a person who has no concern with risk at this time.
relentless
Posts: 457
Joined: Mon Mar 14, 2011 10:05 pm

Re: Buying I Bonds for Children

Post by relentless »

I Bonds are now yielding 9.62%! We were planning to purchase more in our names this month, but it occurred to me that it would actually be a lot more tax efficient to purchase in children's names given our high marginal tax rate (federal+Medicare surcharge on I bonds=35.8%). Money is fungible. Then I found this thread and am bumping it. Some of the prior replies answered a lot of my questions, but I have more that should be relevant to the OP and others.

Our children currently have negligible assets (relatively trivial quantity of iBonds purchased end of last year) and we never previously had to even concern ourselves about "kiddie tax" implications, although now I understand how it works.

I was already thinking it would made sense to declare the interest each year by filing a tax form annually for each child. This also would allow unwinding of positions in IBonds later without taking a tax hit (i.e. when inflation goes back down), which would not be possible with the IBonds in our own names. I already prepare our taxes each year and doubt that filling out a few more short returns would be a big deal.

My main concern about this approach is this comment on TreasuryDirect:
"Once you start to report the interest every year (for example, for a child in the child's Social Security Number), you must continue to do so every year after that for all your savings bonds (or, for example, the child's bonds) and any you acquire (or, the child acquires) in the future." (https://www.treasurydirect.gov/indiv/re ... nsider.htm)

Form 550 confirms this but clarifies that possible to change methods with "permission": "Once you choose to report the interest each year, you must continue to do so for all Series EE, Series E, and Series I bonds you own and for any you get later, unless you request permission to change, as explained next." (https://www.irs.gov/pub/irs-pdf/p550.pdf)

Thus, while it is possible to change methods, the risk is that my children when adults might not know they even need to send a letter to the IRS to do this--and then run afoul of the rules unwittingly (e.g. when they are earning a salary and may prefer to defer taxes on newly purchased bonds)? Is this a legitimate concern or am I over-thinking this? Should I just plan to send a letter to the IRS for each child once all the I Bonds are sold and used for their intended purpose (children's expenses such as college)?
toddthebod
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Re: Buying I Bonds for Children

Post by toddthebod »

relentless wrote: Sun Jul 24, 2022 12:16 am I Bonds are now yielding 9.62%! We were planning to purchase more in our names this month, but it occurred to me that it would actually be a lot more tax efficient to purchase in children's names given our high marginal tax rate (federal+Medicare surcharge on I bonds=35.8%). Money is fungible. Then I found this thread and am bumping it. Some of the prior replies answered a lot of my questions, but I have more that should be relevant to the OP and others.

Our children currently have negligible assets (relatively trivial quantity of iBonds purchased end of last year) and we never previously had to even concern ourselves about "kiddie tax" implications, although now I understand how it works.

I was already thinking it would made sense to declare the interest each year by filing a tax form annually for each child. This also would allow unwinding of positions in IBonds later without taking a tax hit (i.e. when inflation goes back down), which would not be possible with the IBonds in our own names. I already prepare our taxes each year and doubt that filling out a few more short returns would be a big deal.

My main concern about this approach is this comment on TreasuryDirect:
"Once you start to report the interest every year (for example, for a child in the child's Social Security Number), you must continue to do so every year after that for all your savings bonds (or, for example, the child's bonds) and any you acquire (or, the child acquires) in the future." (https://www.treasurydirect.gov/indiv/re ... nsider.htm)

Form 550 confirms this but clarifies that possible to change methods with "permission": "Once you choose to report the interest each year, you must continue to do so for all Series EE, Series E, and Series I bonds you own and for any you get later, unless you request permission to change, as explained next." (https://www.irs.gov/pub/irs-pdf/p550.pdf)

Thus, while it is possible to change methods, the risk is that my children when adults might not know they even need to send a letter to the IRS to do this--and then run afoul of the rules unwittingly (e.g. when they are earning a salary and may prefer to defer taxes on newly purchased bonds)? Is this a legitimate concern or am I over-thinking this? Should I just plan to send a letter to the IRS for each child once all the I Bonds are sold and used for their intended purpose (children's expenses such as college)?
Unless you are building them a nest egg of a hundred thousand dollars of I bonds, paying the annual interest now and switching to deferred interest once they are working just seems like more trouble than it's worth. Even if they remember to send the letter to ask permission to defer interest once again, they have to track their prior interest and any tax payments until they redeem the I bonds and then file appropriately at that time to account for the fact that they already paid some but not all of the tax due on the interest earned.
Backtests without cash flows are meaningless. Returns without dividends are lies.
relentless
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Re: Buying I Bonds for Children

Post by relentless »

Thanks for response, Todd. I didn't mean to imply that I would want to switch methods for my purposes. My intent would be to use them for college (or perhaps other expenses earlier if need arose). The concern was that it appears that even if the child had no savings bonds remaining, if they decided to purchase them later on their own, they would still be committed to pay the taxes annually, yet not know that they were obligated. This is not intuitive.
relentless
Posts: 457
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Re: Buying I Bonds for Children

Post by relentless »

BTW, the tax savings per year assuming 9.62% for entire year on 10k in a given child's name would be $344 in a year at our tax rate. For context, we bought the maximum 20k last year in our own names. Seems like low hanging fruit to do this. I Bonds are yielding far more than the stable value fund available in our state's 529.

I suppose another option could be simply to sell the IBonds periodically (e.g every 1.5-2 years), take the 3 month interest hit and then just make sure to stay under the $2200 kiddie tax threshold. It may be that inflation comes under control in next few years in any case, and then I Bonds will become less attractive. We probably would want to switch the funds to equities in a UTMA account at that point.
evelynmanley
Posts: 666
Joined: Tue Sep 21, 2010 9:13 am

Re: Buying I Bonds for Children

Post by evelynmanley »

relentless wrote: Sun Jul 24, 2022 12:16 am I Bonds are now yielding 9.62%! We were planning to purchase more in our names this month, but it occurred to me that it would actually be a lot more tax efficient to purchase in children's names given our high marginal tax rate (federal+Medicare surcharge on I bonds=35.8%). Money is fungible. Then I found this thread and am bumping it. Some of the prior replies answered a lot of my questions, but I have more that should be relevant to the OP and others.

Our children currently have negligible assets (relatively trivial quantity of iBonds purchased end of last year) and we never previously had to even concern ourselves about "kiddie tax" implications, although now I understand how it works.

I was already thinking it would made sense to declare the interest each year by filing a tax form annually for each child. This also would allow unwinding of positions in IBonds later without taking a tax hit (i.e. when inflation goes back down), which would not be possible with the IBonds in our own names. I already prepare our taxes each year and doubt that filling out a few more short returns would be a big deal.

My main concern about this approach is this comment on TreasuryDirect:
"Once you start to report the interest every year (for example, for a child in the child's Social Security Number), you must continue to do so every year after that for all your savings bonds (or, for example, the child's bonds) and any you acquire (or, the child acquires) in the future." (https://www.treasurydirect.gov/indiv/re ... nsider.htm)

Form 550 confirms this but clarifies that possible to change methods with "permission": "Once you choose to report the interest each year, you must continue to do so for all Series EE, Series E, and Series I bonds you own and for any you get later, unless you request permission to change, as explained next." (https://www.irs.gov/pub/irs-pdf/p550.pdf)

Thus, while it is possible to change methods, the risk is that my children when adults might not know they even need to send a letter to the IRS to do this--and then run afoul of the rules unwittingly (e.g. when they are earning a salary and may prefer to defer taxes on newly purchased bonds)? Is this a legitimate concern or am I over-thinking this? Should I just plan to send a letter to the IRS for each child once all the I Bonds are sold and used for their intended purpose (children's expenses such as college)?
This article might address your question:

I Bonds Tax Treatment During Your Lifetime and After You Die
January 17, 2022 by Harry Sit

https://thefinancebuff.com/i-bonds-taxe ... fault.html
eric321
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Re: Buying I Bonds for Children

Post by eric321 »

I have kids a similar age and loaded up on I bonds in Dec and January. These have performed so much better than the stock market. We are limited by ibond purchases but it doesn't mean you can't add onto 529 accounts for equities now that we have dropped 20%. Over time this will smooth out the asset allocation.

Despite the name, think of ibonds as very high yielding cash. Inflation is here, but also somewhat backward looking. You get paid for inflation that happens vs what inflation will be, so it makes sense to keep holding I bonds for the near term.

It makes sense to switch to equities for the child at some point. You can always put the cash in a brokerage account for the child.. Withdrawl funds for a trip to Disney, Summer camps, ski vacations, and then add more funds in a 529.
evelynmanley
Posts: 666
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Re: Buying I Bonds for Children

Post by evelynmanley »

relentless wrote: Sun Jul 24, 2022 1:13 am BTW, the tax savings per year assuming 9.62% for entire year on 10k in a given child's name would be $344 in a year at our tax rate. For context, we bought the maximum 20k last year in our own names. Seems like low hanging fruit to do this. I Bonds are yielding far more than the stable value fund available in our state's 529.

I suppose another option could be simply to sell the IBonds periodically (e.g every 1.5-2 years), take the 3 month interest hit and then just make sure to stay under the $2200 kiddie tax threshold. It may be that inflation comes under control in next few years in any case, and then I Bonds will become less attractive. We probably would want to switch the funds to equities in a UTMA account at that point.
These articles might address your questions:

https://thefinancebuff.com/buy-i-bonds-kids-name.html

https://thefinancebuff.com/cash-out-i-b ... -plan.html


FYI, the 9.62% interest rate applies to a six-month period, not a year:

https://www.treasurydirect.gov/indiv/re ... ms.htm#now

<What interest will I get if I buy an I bond now?

The composite rate for I bonds issued from May 2022 through October 2022 is 9.62 percent. This rate applies for the first six months you own the bond.
<
dan7800
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Joined: Wed Apr 07, 2021 5:49 am

Re: Buying I Bonds for Children

Post by dan7800 »

I have a 1 year old and another child on the way. I am in a similar position. I was considering iBonds, and will likely decide against it.

- I am purchasing 20k/yr for ibonds for my wife and I that we will use for retirement in 20+yrs.
- I will be putting 10k/yr aside in the child's 529 in a low cost total market index fund (basically VT) -- I figure that this will grow at a much better rate over 18 years than an iBond will. The only "issue" is that in NYS, you can only deduct 10k/yr TOTAL (I believe) for 529 contributions. It is not per child. Therefore, I need to decide if I go over this 10k/yr amount or if I just do something like 5k/yr per child until they are 18 (I am also a college professor, so much of my kids expenses SHOULD be covered by the institution under tuition reimbursement).

- Instead of a custodial account, I am saving the rest under an index fund in my name. I figure that I can always give the child $$$ later on.

Just my 2 cents.
relentless
Posts: 457
Joined: Mon Mar 14, 2011 10:05 pm

Re: Buying I Bonds for Children

Post by relentless »

Thanks for the finance buff references above, which were very helpful. Not sure how I missed as I have followed Harry for a long time.

I think it makes most sense NOT to declare interest as you go and simply sell the bonds to harvest the income up to the targeted amount (1100 or just under 2200 depending on goals). I agree with him that changing from the default method complicates things too much.

Harry didn't mention it that I saw, but the other big reason NOT to do this is that interest is too unpredictable since rate varies, and it could backfire if rates were to increase and push the un-earned income over 2200 (for a child not working). Also the kiddie tax gets more complicated once kids have earned income, which is probable for teenagers. Worst case, kids can take school loans and decide themselves how and when to sell the ibonds after age 24 to pay back (if necessary). Selling the bonds at end of year allows for precision of actual interest amount.

<"FYI, the 9.62% interest rate applies to a six-month period, not a year:">

Yes, I realize that the actual rate may be less (or more) than 9.62% over next 12-month period. That is why I used word "assume".

Other mitigating factor is that it is not actually a 3-month hit when selling before 5 years, but only 2 months, since I purchase at end of month.

As long as fixed rate stays at zero (i.e. don't go negative) and amounts you can purchase don't go down, you can replace an older bond with a new bond.
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