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.
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.
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.
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.
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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