As news on I Bonds spreads, some people are looking for ways to buy more I Bonds beyond the limit of $10,000 per person per calendar year. Buying in a trust account is one way. Buying savings bonds in your children’s names, buying with your tax refund, buying for your business, and buying as a gift are some other ways. We’ll cover buying in a kid’s name in this post. For background on I Bonds in general, please read How To Buy I Bonds.
Children Can Invest Too
First of all, we’re talking about kids under 18 here. Adult children can buy I Bonds in the same way as any other adult. If your adult children don’t have spare cash, you can give them money and they can use the money to buy I Bonds (or anything else). If you’d like to buy I Bonds and then give the bonds to them as a gift, that’s buying as a gift. We cover buying I Bonds as a gift in a different post.
Children under 18 can invest too, not only in I Bonds but also in other investments such as savings accounts, CDs, mutual funds, ETFs, etc. Because children under 18 can’t legally agree to terms and conditions when they’re a minor, an adult has to open an account for them and act as a custodian. These accounts are typically called UTMA accounts, which are named after the law that governs custodial accounts: Uniform Transfer to Minors Act.
If you already have UTMA accounts for your children and you’re just diversifying part of their investments into I Bonds, you can skip some of the discussion on whether you should open an account in your children’s name in the first place.
Money In a Child’s Name
Money in a child’s name belongs to the child. You’re only holding the money and investing on their behalf until the child becomes an adult. Even if you gave the money to the child to begin with, you can’t take the money back or spend it willy-nilly. You can spend money from the child’s account but it has to be on something that specifically benefits that child. Spending the money on their after-school programs or sports uniforms and equipment may be OK but not for general household expenses.
As the custodian, you can decide to invest the child’s money in mutual funds, ETFs, or I Bonds. Once the child becomes an adult, your duty as the custodian is over and you must turn over the investments to the child. If they decide to blow the money on a Tesla or travel to Antarctica, that’s their prerogative.
If you’re only thinking of “borrowing” a child’s Social Security Number to buy more I Bonds, and you’ll cash out the bonds for your own spending and investments before they become an adult, don’t. When you open an account in the name of a child, you represent to the government you’re giving an irrevocable gift to the child. When you cash out the bonds, you represent to the Treasury department you’ll spend the money specifically for the child’s benefit. Making false statements to the federal government is a crime.
Money in a child’s name has some tax benefits, which we’ll discuss in a later section. If God forbid, you file a tax return on behalf of the child to claim the tax benefits pertaining to the child receiving interest from the bonds when you only take the money back to yourself, you’ll engage in tax fraud, which will get you into more trouble.
529 Plan Is Better for College
If you intend to use the money for the child’s college expenses, it’s probably better to put the money in a 529 plan than a custodial account. Depending on where you live, you may get a state tax deduction or credit for contributing to a 529 plan. Earnings in a 529 plan are tax-free when the money is distributed for qualified higher education expenses whereas earnings in a custodial account are taxable.
When the I Bonds are in a child’s name, the interest is still taxable even if the bonds are cashed out for qualified education expenses. When the I Bonds are in a parent’s name, it’s possible that the interest is tax-free when they’re used for a child’s qualified higher education expenses. However, many high-income parents don’t meet the qualifying income limit to make it tax-free. See Cash Out I Bonds Tax Free For College Expenses Or 529 Plan.
If the child is still young, money in a 529 plan can be invested in stocks for possibly better returns whereas I Bonds at current rates only match the rate of inflation. When the child is ready to go to college, money in a 529 plan is also treated more favorably in financial aid considerations than money in a custodial account.
If the money isn’t for college expenses but for some other expenses specifically for the child, there are some limited tax benefits in putting the money under the child’s name as opposed to keeping it in your own name.
When you cash out I Bonds under the child’s name (either to transfer to a custodial account elsewhere or to spend specifically for their benefit), the accumulated interest is taxable to the child. The first $1,100 in interest income is tax-free because it’s covered by the child’s standard deduction. The tax on the next $1,100 is at the child’s tax rate, which starts at 10% when they have no other income. The tax on interest income above $2,200 is at your tax rate, which would be the same had you kept the money in your own name.
So the federal income tax benefit of putting money in a child’s name is limited to the first $2,200 in investment income. The child pays a blended 5% on $2,200 versus you pay at your marginal tax rate. You need to file a tax return on behalf of the child to realize the tax savings. The child’s tax return is relatively simple when they don’t have other income. Downloaded tax software offers five federal e-files for this purpose.
Gift Tax Form 709
Both contributing to a 529 plan for the child and buying I Bonds in their name count as gifts to the child. There’s an annual gift tax exclusion amount, which is $16,000 in 2022 and 17,000 in 2023. If the total gifts during the year from one specific giver to one specific recipient go above this gift tax exclusion amount, you’re required to file a gift tax return on IRS Form 709.
If you’re bumping against the annual gift tax exclusion amount between contributing to their 529 plan and buying I Bonds in their name and you’d like to avoid filing the gift tax return, consider splitting it up between two parents. Have one parent contribute to the 529 plan and have the other parent buy I Bonds.
Minor Linked Account
After considering the limitations of holding money in the child’s name, the possibly better alternative of simply adding to their 529 plan, the limited tax benefits, and having to file a tax return for the child, if you still want to buy I Bonds in the child’s name, here’s how.
Only a parent, guardian, or person providing chief support for the child can open an account for the child. If you aren’t a parent, guardian, or person providing chief support, you should let a proper person open an account for the child. See the “Buying for a Grandchild” section below if you’re a grandparent (or aunt or uncle).
If you are a parent, guardian, or person providing chief support for the child, you need a TreasuryDirect account for yourself first even if you’re only buying in your child’s name. See How to Buy I Bonds if you don’t have an account yet.
After you already have an account for yourself, log in to your TreasuryDirect account. Then go to ManageDirect. Find the link for “Establish a Minor Linked Account” on the right under “Manage My Linked Accounts.”
Fill out the required information (full name, Social Security Number, date of birth, etc.). The primary bank account linked to your TreasuryDirect account is automatically linked to this Minor Linked Account for the child.
Repeat the above if you’d like to create a Minor Linked Account for another child.
After the Minor Linked Account is created, you go into it by clicking on the “Access my Linked Accounts” link under ManageDirect.
Then you buy I Bonds as usual in each Minor Linked Account. You can name yourself as the beneficiary. See How to Buy I Bonds. The purchase limit is $10,000 per child per calendar year.
Buying for a Grandchild
There’s a tradition for grandparents to buy savings bonds for their grandchildren for Christmas or birthdays. This used to be done in paper bonds. Now it’s in electronic form.
Because only a parent, guardian, or person providing chief support for the child can open an account for the child, you should ask the child’s parent to open an account for themselves first, and then open an account for the child under the parent’s account. The parent needs to do this even if they’re not buying any I Bonds themselves.
You then buy a gift for the child. You’ll need to ask the parent for the child’s TreasuryDirect account number and Social Security Number. Then you follow the steps in Buy I Bonds as a Gift. The same process also works when you’re buying for a niece or a nephew.
Cashing Out / Redemptions
When you cash out I Bonds from a Minor Linked Account for your child, the money goes to the linked bank account. After that, you can transfer the money to the child’s UTMA account elsewhere for some other investments for your child or spend the money on expenses that specifically benefit the child.
Just like cashing out I Bonds in any other account, by default the accumulated interest is taxable to the child in the year you cash out. TreasuryDirect will generate a 1099-INT form but they won’t send it by mail. You’ll have to remember to come into the Minor Linked Account and download or print the 1099 form. You use the 1099 form to file the tax return for the child.
You can choose to declare interest annually on behalf of the child. The child pays lower taxes this way but you’ll have to do more work. See I Bonds Tax Treatment During Your Lifetime and After You Die.
When the child reaches 18, they can set up their own TreasuryDirect account as an adult. You “de-link” in ManageDirect and transfer the bonds in the Minor Linked Account to their adult account. They’ll take over from there.
Only moving the bonds from the Minor Linked Account to their adult account in TreasuryDirect doesn’t trigger taxes. Cashing out does.
Buying I Bonds in a child’s name is relatively simple. The more important questions are:
1. Do you want to give money to the child in the first place, as opposed to adding to their 529 plan or keeping full control of the money in your own name?
2. How much of the child’s money should you invest in I Bonds that match inflation as opposed to in mutual funds and ETFs for long-term growth?
Remember money in a child’s name belongs to the child.
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