Bridget Sullivan Mermel CFP(R) CPA
Give I Bonds to Kids: Save Tax, More Flexible than 529s
Updated: Jan 7, 2022
Series I Bonds savings bonds are currently paying more interest than other safe investments. That means a lot of people are paying attention. In this, our third episode about I Bonds, we talk with Linda Stratton CFP(R) about how to give I Bonds as gifts, and talk about I Bonds versus 529 college savings plans, and the real life pros and cons of I Bonds.
Bridget Sullivan Mermel CFP(R) CPA and John Scherer CFP(R) go beyond what the Treasury Direct site says—what do people who own I Bonds actually experience?
Linda has made gifts of I bonds to relatives. To try to mirror the old-fashioned way of getting actual pieces of paper, I Bonds are “stored” in a “gift box” on your account on the I bonds site. It’s easy to use the gift box. To buy a gift for someone, it’s easy to go to your gift box. You’ll need the beneficiary’s name, social security number, and birthday.
When you decide it’s time to pass them along, then the person needs to open their own account. Once you have their own account number, it’s easy to transfer the I bonds to the beneficiary.
You control I Bond account until you decide to present it to the beneficiary. You will need to have a conversation with the beneficiary about opening their account. It’s a good educational moment. You can let them know-I’ve been saving this money for you—it’s part of a financial foundation for you. You can make a splash with it.
I Bonds for gifting are different than 529 accounts because 529 college savings accounts can be invested in the stock market, so they may grow larger than I Bond accounts which are safer and earn interest.
529 accounts are limited though—you need to use them for education. I Bond accounts, once gifted, can be used for anything. So, the beneficiary could use them to pay for tuition, or they could start a business, throw a party, buy a car, or travel.
Linda sums up the main pros and cons of I Bonds:
Pros Safe and higher interest earnings are tax deferred
Cons Series I Bonds are only available through the Treasury Direct website. It’s a pain if you lose your login. Treasury Direct doesn’t send you statements, so you need to make sure that beneficiaries know about these. People can forget they even have this investment.
Bridget: I Bonds can be a great gift to give your nieces, nephews, grandkids, or anybody else you want to give a gift to. Today, we're going to be talking to Linda Stratton, a fee-only financial planner in Tucson, Arizona. Hi, I'm Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I run a fee-only financial planning practice in Middleton, Wisconsin. And before we start talking with Linda, I just wanted to make a quick reminder for everybody to subscribe to our channel. It helps other people find this great information. And so click that "Subscribe" button. And then I want to get started and introduce Linda Stratton from Tucson, Arizona. Linda, thanks so much for coming back on our show to talk again about I Bonds.
Linda: I'm really happy to be here!
John: Yeah. This is good! Last episode we had so many great things we got into. And today we want to talk a little bit about…last time we talked about who I Bonds makes sense for in general. And then I know you had talked about using them as gifts to people…that you've actually made some gifts to nieces and nephews. And I was hoping you could just share some of your experience about why you did it and how it worked out.
Linda: Okay. Thank you. So one of the features of I Bonds is that you can make gifts, and they sit in a gift box. So, for instance, in my case, when my nieces and nephews were very small, I started on birthdays plunking in, say, $25 into a gift box for them…for years. So, when you make gifts of I Bonds now, because all I Bonds are electronic (in the old days, there used to be paper I Bonds, but now it's electronic) so you need your I Bond account.
And in our other episode, we talked about why I Bonds are good to have, and it's very easy to go to the gift box. And the information that you really need is your beneficiaries full name and then their Social Security number. I can't remember if you need their birth date or not, but you might as well get that just to be prepared. But definitely their Social Security number.
And then when you make I Bonds over a period of time, the idea is to accrue I Bonds in the gift box because they'll be earning the inflation adjusted interest every year. And then when you decide it's time to pass on the I Bonds to your niece or nephew or grandchild or other beneficiary, it's very easy. On the beneficiary’s side, they do need to open their own Treasury Direct account, and you need that account number, but once you have that, it's very easy to transfer the bonds over to that account.
John: It sounds, Linda, like, back in the old days, paper bonds, right? You'd buy a bond. I remember getting some EE bonds back in those days, right, those are neat gifts. Sort of same concept, but now it's just I log into my Treasury Direct account and set up boxes for whomever I want to make the gift to. It sounded like, if I heard you right, that at some point, then you transfer it over to the kids, in this case. Does that mean if I open up an account, I've got a gift box and I control that account until I decide when to distribute it or when to give it to them?
Linda: Yes. In my case, most of my beneficiaries are still minors, but I control when to send them over. I do need to have the conversation with them about opening their account, but they're young, so they're really all familiar with technology and passwords already, so that hasn't been a problem. And it's also maybe an educational moment to say, “I've been saving this money for you, you know, since 2005. And look what's in here. And this is part of a financial foundation for you.” You can make a little bit of a splash with it in the beneficiary’s, the minor's thinking, the young person's thinking.
John: Yeah, I was just thinking before you said it. Like, Oh, it sounds like an educational opportunity, right? To help people start on a good path of things. And you can sort of make individual, it sounds like, decisions about those beneficiaries. Some folks maybe want to take it over early or some you might want to have to take it over later. And unlike some other options where, sort of, there's rules in place, this might give you some more flexibility as a person thinks about their gifting.
Linda: Yes, it gives some flexibility, and I find it to be, I Bonds to be a very nice compliment to say, if the beneficiary has a 529 plan for college, because of investing in a 529 plan, there's a chance for that account to grow substantially before the child needs it. But the 529 is restricted for education, whereas with I Bonds, there are no restrictions. The child can either have a huge party or go to Europe or use it to pay tuition. You know, there's freedom...and risk.
Bridget: With all the pluses and minuses that entail, right?
Bridget: So it sounds like now we're already talking about some of the pros and cons of I Bonds compared to 529s. We'd like to summarize the pros and cons of I Bonds in general. So, Linda, what would you say top pros and cons are of I Bonds?
Linda: I think the top pros of I Bonds are the rates of return on the cash account, which is like an I Bond--it's a cash account really--have been higher typically than money market. So it's got a pretty good yield on a very safe savings account. US government bonds are super safe, and then the interest is tax deferred, so you don't pay tax until you redeem the bonds. And that's true of the gifts as well. You pass the gift to the beneficiary, they'll pay tax.
And I presume my nieces and nephews in our lower tax bracket than me. So those are great cash savings plans. Some of the cons…one of the cons, interestingly, is sometimes people forget they have I Bonds because it's an electronic account, so they have to remember and they have to keep instructions on how to log in into the account for their successor. If they were to become disabled or pass away, you want someone to know there's money in the computer.
And a related issue is in some cases, people don't log into their account frequently enough, and believe it or not, have lost their login information. That is a hassle to call Treasury Direct and get into your account. I recommend being a little careful on not losing your login information. And then also the other kind of hassle with I Bonds is that every time you buy an I Bond, it's an individual purchase. So let's say you buy one hundred $25 bonds over ten or 20 years. So then they're all tracked separately.
So when you redeem them, you've got to redeem them one by one. It only takes, like, you know, 15 seconds per bond, but it's not an aggregate account. They're all individual. So if you're saving annually, you might want to make a larger within the $10,000 annual max, a bigger purchase at some point rather than little purchases every month.
John: That's great. Thanks so much for sharing this. This has been some really interesting information: learning about who I Bonds are for, how it works, and this idea of gifting and having some sort of maybe middle ground between just college money and just investment money. Some really super things.
Thanks so much for sharing with us here today, and this is probably a good time to wrap up here, that both Linda and I and Bridget are members of the Alliance of Comprehensive Planners, fee-only, tax focused, comprehensive planners. And if you're interested in learning about things like this because most people aren't telling their clients about money at Treasury Direct, check out acplanners.org to find somebody in your area.
Bridget: And the other thing we want to remember is to ask people to subscribe. That helps other people be able to find us. So you're helping us out and helping us keep the YouTube channel alive. So with that, I want to say a big thanks to Linda. Really appreciate you coming on our show and sharing your knowledge and experience and thanks to John, too. And we'll see you next time on Friends Talk Financial Planning.
Linda: Very good. Thank you.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.