How to Buy I Bonds for a Child (Step-by-Step Tutorial) - YouTube

Hi everyone, it's Mia.

One of the most frequently asked questions from my "How to buy I Bonds" video is how

you would buy I Bonds for a child under the age of eighteen.

So in this follow-up video, I'll provide a step-by-step tutorial on how to create a minor

account in TreasuryDirect.gov so you can buy I Bonds for a child or grandchild under the

age of 18.

I Bonds are currently paying 7.12 percent for the first six months of the bond’s issued

date.

It’s a great way to teach kids to save.

If you haven't seen my video on how to buy I bonds, which goes into a lot more detail

on how I bonds work and how you would set up an account at TreasuryDirect.gov, I'll

include the link in the video description below.

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Before we get into the tutorial, it’s important to go over some things that you should consider

before buying I Bonds in a child’s name, such as tax implications and whether or not

it would make sense to buy I bonds for a child if you’re saving for something like college.

Keep in mind that I am not a tax professional or a financial advisor and this is just my

opinion.

You should seek the advice of a tax professional or financial advisor who would take your individual

circumstances into account.

So in this video, we’ll go over: How minors can own I bonds, what a parent or guardian

can do in a minor account, I Bonds vs 529 for education, including impact on financial

aid (FAFSA), tax treatment on the interest, and finally, we’ll get into the step-by-step

tutorial on how actually to create a minor account and buy I bonds from TreasuryDirect.

In general, children under the age of 18 can invest in stocks and bonds, not just I bonds.

Because they are a minor, they cannot legally consent to the terms and conditions, so a

parent or guardian, who acts as the custodian, can create an account and purchase investments

on their behalf.

The purchase limit for I bonds of $10,000 per calendar year also applies to minor accounts.

Once you buy I bonds in a child’s name, it is considered an irrevocable gift to the

child and should be treated as such.

The control of the account is handed over to the child at the age of 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., that’s perfectly fine.

But when you open a TreasuryDirect account in the name of the child, you should consider

it a completed gift for the child.

It becomes the child's money, not yours.

If the intent is to buy "extra" I bonds for yourself, the adult, you should not be purchasing

in your child's name.

If you have a living trust, you can buy an additional $10,000 worth of I bond through

the trust.

You can also overpay your taxes to ensure you get a tax refund, where you can buy up

to another $5,000 per calendar year.

So what can a parent or guardian do in a minor account?

As the custodian of the account, you can access the account at any time.

You can buy and sell savings bonds and perform other transactions within the account on behalf

of the minor.

When your child turns 18 and establishes his/her own TreasuryDirect account, you may de-link

the bonds into their new account.

De-linking refers to moving the Linked account's bonds to a separate Primary TreasuryDirect

account.

Once the minor account is de-linked, it is deactivated and you will no longer be able

to perform any transactions on the child’s behalf.

If you choose to maintain the Minor account once the minor reaches 18, you are restricted

from performing nearly all transactions, however, you can still purchase bonds on the child's

behalf.

I Bonds vs 529 for education expenses, including impact on financial aid (FAFSA).

Before making any investment, always consider your goal and timeline.

If your goal is to save for college for the child, a 529 account, which is made specifically

for saving for college, is better since it is a tax-advantaged account.

Any capital gains in the 529 account is tax-free when used for college.

And if your child is young and has at least 10 years before they go off to college, investing

in stocks may potentially give you higher returns than buying I bonds.

The stock market risk is reduced by the longer timeframe, since they can ride out any interim

market downturns.

In my opinion, and this is only my opinion, I bonds are a good choice if 1) you want to

help your child learn to save, and instead of giving them cash for their birthday or

the holidays, you give them I bonds instead, 2) your child does NOT intend to attend college,

or 3) if you know for a fact that your child will NOT qualify for financial aid because

your income is too high.

I Bonds are also good if you plan to use it for the benefit of the child for some anticipated

cost in the future before the child’s 15th birthday, such as a special school trip or

to pay for a child’s extracurricular activities.

The reason why you would want to use the funds before the child’s 15th birthday is because

when the child applies for financial aid for college in their final year of high school,

FAFSA will look at your income tax return from the two years prior, and Treasury bonds

held in a child’s name would count as the student’s asset, and the FAFSA calculations

would expect the student to contribute 20 percent of their assets to their own education.

This is why if you’re planning to save for college, and unless you know that your child

will not qualify for any financial aid, a 529 account is the better option since 529s

are considered parental assets and only a maximum of 5.64 percent of parental assets

are expected to be used to contribute towards the child’s college education.

Additionally, capital gains from 529 accounts are not subject to the Kiddie Tax.

I’ll go into greater detail on the Kiddie Tax in a little bit.

I bonds owned under a child’s name is subject to unearned income tax.

This is known as Tax On A Child's Investment And Other Unearned Income, commonly referred

to as the Kiddie Tax.

529s are not subject to the Kiddie Tax.

For 2021, the first $1,100 of a child's unearned income qualifies for the standard deduction

and is tax-free.

Interest up to this amount does not have to pay taxes.

Between $1,100 and $2,200 is taxed at the child's tax rate, which starts at 10% if the

child has no other earned income.

Unearned income greater than $2,200 is taxed at the parent's normal marginal tax bracket.

If your child has interest income greater than $2,200, you will need to file IRS Form

8615, Tax for Certain Children Who Have Unearned Income.

For 2022, the first $1,150 of a child’s unearned income qualifies for the standard

deduction and is tax-free.

Between $1,150 and $2,300 is taxed at the child’s income tax rate.

Income beyond $2,300 is taxed at the parent’s normal marginal tax bracket.

One of the benefits of having the savings bond in the parent’s name as opposed to

the child’s name is that if your income is below a certain threshold, the interest

earned on the bonds may be exempt from federal income tax if you use it for your child’s

qualifying education expenses.

You or your spouse, or both, must own the bond.

Your child may be a beneficiary but not a co-owner.

There are two ways to buy I bonds for a child: paper bonds and electronic bonds.

As an adult, you can buy a paper Series I bond for a minor through the tax-time bond

program, using proceeds from your federal tax return.

To buy I Bonds with your tax refund, use IRS form 8888.

In Block 5b, you would enter the child’s name.

If you would like to be a co-owner, put your name in

Block 5C.

Keep in mind that for co-owned accounts where the child is named as the Primary Owner and

the parent is named as the secondary owner, the person who purchased it will be responsible

for paying taxes.

This is from the IRS, which states the following regarding co-owned accounts: “Co-owners.

If a U.S. savings bond is issued in the names of co-owners, such as you and your child or

you and your spouse, interest on the bond generally is taxable to the co-owner who bought

the bond.”

For electronic bond purchases, the parent or guardian will need to set up a Minor-Linked

account from the parent’s TreasuryDirect account.

The only way to go to the minor’s account is through the parent’s account.

To do this, first, log into your TreasuryDirect account.

If you do not have an account created, check out my video “How to buy I Bonds” which

shows you step-by-step how to create an account.

The link to the video is in the description below.

We’re going to start at the TreasuryDirect website.

Click on the “TreasuryDirect” link below “Account Login”.

Click on the little orange Login button.

Enter your account number, then click Submit.

You might get another screen where TreasuryDirect asks you to enter a one-time passcode if you

did not register your computer.

You would get the one-time password from your email.

Now enter your password using the virtual keyboard.

This is not case-sensitive.

Then click Submit.

From here, we’re going to go to the ManageDirect tab here and click on it.

then click on "Establish a Minor Linked Account".

From here, you will need to answer your Security Question then click Submit.

Next, register the child's information.

You will need to fill out the first name, optional middle name, and last name.

Then enter the child's full social security number.

You can give the account a name.

Then select if you want to use your primary account address information or if you want

to register a different address for the child.

Then scroll down and review the bank information.

There’s a note here that tells you how you can add a different bank account after account

registration.

Check the box to certify that the information is true and correct and that the child doesn’t

owe any backup withholdings.

Then click Submit.

Now review the account information to make sure that everything is correct.

Then scroll down and click Submit.

The account is now set up.

Now go up to the upper-right hand corner here and select the account number next to your

name.

You should be back in the ManageDirect section.

From here, click on "Access my linked account" to buy I Bonds.

Select the account that you want to buy bonds for, then click Submit.

Now go to the top and click on the “BuyDirect” tab.

Select the Series I savings bonds then click Submit.

The registration should automatically have the child’s name.

If you want to register it differently, click on “Add New Registration”.

Enter the amount that you want to purchase and make sure the correct bank account is

selected.

Pick the date that you want to make the purchase, then click “Submit”.

Review your purchase then click Submit.

This is just the confirmation page.

You should be all set.

Once your child reaches the age of 18, you can de-link the account by clicking on "De-link

a linked account" here.

Select the account that you want to de-link then click Submit.

Your child will need to create their own TreasuryDirect account.

Once their account has been created, they will have their own account number, which

you will enter here.

Then click Submit.

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