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 in your children’s names, buying for your business, and buying as a gift are some other ways. We’ll cover buying in a child’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 children under 18 here. Adult children are adults. They 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 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 your child’s name belongs to your child. You’re only holding the money and investing on their behalf until your child becomes an adult. Even if you gave the money to your 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 sports uniforms and equipment may be OK but not for general household expenses.
As the custodian, you can decide to invest your child’s money in mutual funds, ETFs, or I Bonds. Once your 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” your 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 your child, you represent to the government you’re giving an irrevocable gift to your child. When you cash out the bonds, you represent to the government you’ll spend the money specifically for the child’s benefit. Making false statements to the federal government is a crime and can be prosecuted.
Money in a child’s name has some tax benefits, which we’ll discuss in a later section. The requirements to give the money to the child without strings and the restrictions on how you can use the money come along with the tax benefits. If, God forbid, you file a tax return on behalf of your 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 your 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 college expenses whereas earnings in a custodial account are taxable.
When the I Bonds are in the child’s name, the interest is still taxable even if the bonds are cashed out for their college 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 college 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 your 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 inflation. When your 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.
Kiddie Tax
If the money isn’t for college expenses but for some other expenses specifically for the child, there are some limited tax benefits to put the money under your child’s name as opposed to keeping it in your own name.
When you cash out I Bonds under your child’s name (either to transfer to a custodial account elsewhere or to spend specifically for their benefit), the accumulated interest is taxable to your child. The first $1,100 in interest income covered by the child’s standard deduction is tax-free. 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 tax benefit of putting money in your child’s name is limited to the first $2,200 in investment income. Your 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 your 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 your child and buying I Bonds in their name count as gifts to your child. There’s an annual gift tax exclusion amount, which is $15,000 in 2021 and 16,000 in 2022. 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 your 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 your child, if you still want to buy I Bonds in your child’s name, here’s how.
First, log in to your own TreasuryDirect account. Then go to ManageDirect. Find the link for “Establish a Minor Linked Account” on the right.
Fill out the required information (name, Social Security Number, date of birth, etc.). The primary bank account linked to your account is automatically linked to this Minor Linked Account for your 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. The purchase limit is also $10,000 per child per calendar year.
Cashing Out
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 a custodial 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, the accumulated interest is taxable to the child in the year you cash out. TreasuryDirect will generate a 1099-INT form but it 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 your child.
Reaching Adulthood
When your 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.
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Buying I Bonds in your child’s name is relatively simple. The more important questions are:
- Do you want to give money to your child in the first place, as opposed to adding to their 529 plan or keeping full control of the money in your own name?
- How much of your 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 your child’s name belongs to the child.
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Barry Dreayer says
Love your emails/articles. As a CPA, I started referring to them, especially about I bonds.
What about the strategy of not deferring interest income on the I bonds? Might that be advantageous for some kids if their other investment income is low, keeping them out of the kiddie tax?
Keep up the great work.
Harry Sit says
I’m leaving it out as an “advanced” tactic. It works in theory but it introduces a lot of complications when there are multiple purchases and redemptions. You’d have to track the accrued interest bond by bond. It’s not easy because TreasuryDirect doesn’t issue any monthly statements. You only see the current redemption value, and it’s displayed without the last three months’ worth of interest when the bond is within its first five years. You need the redemption values on January 1 with the three months’ worth of interest added back.
If a client comes to you and wants you to track and report the accrued interest on multiple bonds purchased at different times, you’d probably have to charge the client more than the tax savings. And if they go to a different CPA after they move, the next CPA may not know what you did, and it’s very easy to pay tax again on the redemption when there’s a 1099 form showing all accumulated interest.
It works if you use a spreadsheet to track and calculate interest for your own children when you don’t charge your children for your time.
Steve says
In addition to the tax differences, there could be even larger effects on financial aid. I believe Treasury bonds in the student’s name count as a student asset, and the FAFSA calculations would expect the student to contribute 20% of their assets to their own education. Typically 529s are held in the parents’ names and are only expected to be used up at a rate of 5.64% per year.
Tony says
When buying I Bonds in linked minor account, what should I put in ‘registration’?
my kid’s name as sole owner? or my name and my kid’s name as co-owners?
Harry Sit says
The kid has to be the primary owner in the minor linked account. As the custodian, you have access to the minor linked account to buy or cash out bonds even if the bonds have your kid as the sole owner. Appointing yourself or another person as the second owner or the beneficiary affects what happens if the kid dies.
Vic says
When redeeming I bonds in a minor linked account (after the initial one year hold period) and before the kid becomes an adult, will the redeemed amount be deposited back to the parents bank account? If so, what’s the risk/downsides of buying I bonds in the child’s name and redeeming back to the parents bank account?
Harry Sit says
When you open the minor account, you represent to the government that the money belongs to the child and you’re only managing it on your child’s behalf. When you redeem the bonds, you represent to the government that the money will be used specifically for the child’s benefit (or transferred to another custodian account for the child). Making false statements to the federal government is a crime.
calwatch says
This is viable if you know your kid is going to private primary or secondary school, though. The 529 limit is only $10,000 a year for private school and many states don’t treat private school as advantageous as they do college for their 529’s – California even charges the same penalty for early withdrawal as for non qualified expenses. Although I don’t think it’s worth the benefit, people do send their children to private school for religious or cultural reasons and this would cover it.
Hoa Truong says
My child is 13. I plan on transferring the money back into my bank account just prior to him turning 18. The money will be used to pay for college. Is this ok?
Harry Sit says
If you aren’t comfortable letting your son get hold of the money when he’s 18, don’t buy I Bonds in his name. Put the money in a 529 plan for your son or keep the money in your name.
Tom says
Thanks for the great info! I have a 529 for my daughter, but would prefer to earn the current interest in an I Bond as markets are pretty shaky currently and the I Bond rate is really high. I will eventually cash it out and move the money to the 529, but I am listed as the account owner and she is the beneficiary. Does that satisfy the requirement to transfer the money to a custodian account, or do I need to open a 529 where she is the account owner? Thanks!
Chris says
If I am feeding my children, paying their utilities and rent, and paying for private school then it’s obvious the money is being spent on them. I don’t understand how it would be fraud unless the child doesn’t live with the parent.
Harry Sit says
You have to follow IRS rules when you’re taking advantage of your children’s special low tax rates. General household expenses such as utilities and rent don’t count. Spending on specific expenses for the child such as private school tuition counts. If you don’t want these limitations, keep all the money in your own name.
Chris L says
Yeah I agree with your perspective. I’m highly doubtful the IRS could or would successfully prosecute someone for investing money in their children’s name and then using it for various expenses which benefit their children. I understand where the author is coming from and his low risk advice, but don’t think it’s something we need to worry about. I’m happy to be proven wrong if anyone has substantiated stories or data showing that the IRS will really go after you on this.
Harry Sit says
The rules come from the tax break on putting the money in a child’s name. You don’t have to follow those rules when you decline the tax break by keeping the money in your own name. If you want the tax break but you’re willing to not follow the rules, there are many other ways to cheat on your taxes for much larger benefits.
Peter Kos says
This is a very informative article about I-bonds and minor accounts. In fact by far the best I found after quite a long search. This is exactly what I needed. It pointed out things that didn’t cross my mind such as Form 709 if you exceed combined limit for 529 and I-bonds.
As far as the answer to your question “You Can, But Should You?” the answer is Yes. There are very few vehicles that are that safe and provide 9%+ rate (as expected to become in May). All my other kids funds in 529 or youth brokerage accounts are in stocks/ETFs so the I-bonds provide great diversification at really attractive rates. Buying them in in April will give you at least 8% annual rate. And yes, it all goes to kids…mostly for never ending school tuition fees….
Thanks again for a great article!
Elaine B says
If my child is 12 now and I buy a $10,000 I bond today for him, if I cash it out for him at age 17, who files taxes on the interest earned? This assumes he doesn’t exceed the limit and has to file his own taxes and is still claimed as a dependent on my taxes. Is it his interest and no one pays taxes on it since he doesn’t file a tax return?
Harry Sit says
It’s his money and his income. He files taxes. The current minimum unearned income required to file a return for a dependent is $1,100. His $10,000 I Bond may very well earn more interest in five years than the minimum at that time.
Elaine B says
Thanks for the quick response. As a follow-up, if he elects to claim interest each year instead of at the time it is cashed out, it is possible it would be less than the $1100 unearned income limit? For example, 10,000 X 9.6% would be approximately $960. Thus, no interested would be taxed each year?
Harry Sit says
It’s possible, but he still has to file a tax return each year because the election is evidenced by claiming the interest that year. See Taxes on I Bonds Get Complicated If You Go Against the Default.
Chuck c says
I want to take my kids on a vacation. Can I purchase bonds for them to use on vacation expenses (plane, lodging, etc).
When you purchase i bonds are they are entitled to both the principal and interest earned?
Harry Sit says
I don’t think vacation is specific enough for the kids’ benefits. Both the principal and interest are their money.
Ray says
Can I change $10000 I-bond to my family member as a gift after purchase so that I can buy more I-bond?
Harry Sit says
You can’t change the ownership post-purchase but you can buy a new bond as a gift to your family member. See Buy I Bonds as a Gift: What Works and What Doesn’t.
Brad says
I’ve seen elsewhere that one potential work-around is to set up a co-owner arrangement, whereby a parent is a secondary owner of the bonds with the child as primary. The parent would be responsible for the tax on the co-owned bonds, but it would seem to allow for a mechanism to have families get additional money into I-bonds without the complications of the above. Am I missing something?
Harry Sit says
The so-called workaround doesn’t work. True co-ownership only exists in paper bonds from the tax refund, which you can get anyway without involving your kids. The second owner of bonds in an online account is more like a beneficiary with an optional power of attorney. The primary owner owns the bonds and is responsible for tax 100%.
Mia says
Thanks for the informative post .It is I Bond – best explained. Can I confirm one thing?
If my child is under under 18, am I right that I can both gift him $10k AND opening a minor/custodial account for him and purchase another $10k? In theory, one can do that with each of his or her minor child under 18, correct?
My hope is the two things are not mutually exclusive because they are under different registrations and really totally different things.
My child is turning 18 by end of this year. Both will go to his college tuition within next 5 years.
With the college around corner, it doesn’t make sense to contribute to the sinking 529.
Thanks
Harry Sit says
Receiving a gift counts toward the child’s annual purchase limit. If you buy a gift for your child in the same year you buy directly in the minor linked account, you’ll have to hold the gift undelivered. See Buy I Bonds as a Gift: What Works and What Doesn’t.
Lucy says
Can I buy 10K I-bond for my child and my husbands also buy 10K I-bond for the same child in the same year? does it count as exceeding the limit? What about we deliver 10k I-Bond in two separate years?
Harry Sit says
No, the same child can only buy $10k in the same year. Splitting $20k into two years works.
ray says
Can the primary owner change I-bond gift person name after purchase or the primary owner has to gift this person exclusively?
Harry Sit says
The gift recipient is the owner of the bond. The gift giver can’t make any changes after buying the gift.
Ben Hammond says
My minor kids each have a UTMA (bank and brokerage).
I’d like to have each of them invest $10k in i-bonds this year (for reasons discussed, especially now).
I see you reference my default account linked to MY default bank account. “The primary bank account linked to your account is automatically linked to this Minor Linked Account for your kid.”
What if I want to use each of THEIR existing UTMA bank accounts to fund the I-bond purchase? Once I link a Minor linked account, can I CHANGE the banked account that is linked and the funding source?
If so, am I going to have to get another medallion certifying that minor’s bank account – what a pain that was to open my own account! Especially for someone who doesn’t bank locally…
I take from your writeup that trying to open an account in my minor kids’ names directly is not supported… EG Treadury direct does NOT formally have UMTA accounts?
Thanks for any clarification!
Harry Sit says
The minor linked account is TreasuryDirect’s setup for a UTMA account. You’re the custodian by creating it under your account. TreasuryDirect said this about adding a bank account to the minor linked account:
“After establishing a minor account, if you wish to add any of the bank accounts listed in your Primary account, click the “Contact Us” link and provide the information or call us at (844) 284-2676. If you wish to add a new bank account, go to ManageDirect and click the “Update my Bank Information” link for further information.”
So try ManageDirect in the minor linked account and see what it says. It may ask you to fill out the FS 5512 form and get a signature guarantee though.
Mark says
Thank you for the very informative article. How does the child that turns 18 get to know they have IBonds in their name? In other words, to decrease a chance of spending on items parents may find frivolous, can the parent just wait a few more years (say until the child turns 25) to let the child know that there are these funds available in their name?
Harry Sit says
Your child won’t know unless you tell them but it’s illegal to take another adult’s assets hostage. Your child can sue you after they know. If you don’t trust your child will use the money wisely, don’t put assets under their name.
Happy Parent says
My child participated in a medical trial and earned money themselves. I’d like them to invest their own money in an I-bond. Is the process the same for opening a custodian account if the child is investing their own money?
Harry Sit says
The process is the same. If you’d like to link to the child’s bank account, you can add it to the Minor Linked Account after you create it.
Kim Jue says
My wife and I are considering purchasing a $10,000 I Bond and then leave alone for 30 years. The intent is to provide our 7 year old son a midlife cash bump when he turns age 37. Since we expect to be in a lower tax bracket when he turns 37 and we have absolutely no clue what our son’s tax rate will be, do you recommend putting the I Bond in one of our names and the other parent as primary beneficiary. Once maturity date arrives, we will cash the bond and pay the taxes and then give him the balance. In the event the primary holder of the bond dies prior to maturity, the other parent becomes primary holder and will add child as primary beneficiary; I believe this strategy keeps our child in line for the money and eases the tax burden on him. We don’t plan on telling him this bond exists until it is close time of maturity.
Do you consider this sound advice or is there a flaw we are not considering?
Harry Sit says
That sounds like a good plan. You maintain flexibility by keeping the bonds in your name. You don’t have to tell your son because the money is in your name anyway. If you have a low-income year, you also may be able to cash out the bonds tax-free for your son’s college expenses. See Cash Out I Bonds Tax Free For College Expenses Or 529 Plan.