Savings bonds for kids

[jIM_Ohio]

My parents have offered to buy my twins savings bonds. I believe which mature in 18 years for college. Wife took the call, I was working, still need to get details.

Questions:

1) I think EE bonds are paying low right now. I assume the rate now gets lockrd in for duration?

2) Is it wise to talk my parents into an equity based mutual fund? Makes sense to me, but tact is not my strong suit.

3) explain tax implications for all of above.

thx

[mrpaseo]

Congrats on the twins.

EE Savings bonds are not a good option, though you do earn interest (Currently 3.5% I believe) inflation (3-4%) will eat up any profits so it is not wise. Dave Ramsey better explains it, actually I had about 10,000 dollars in EE Savings bonds until I saw his video, the next day I stopped the allotment (I had 200 a month going to EE Bonds through direct deposit) and I just cashed in most of them to move the funds over to mutual funds.

Maybe someone else can chime in, I hate to keep saying "Dave says" but Dave Says in anything over five years, you need to earn 6% to break even (Inflation and taxes is how he explained it). I understand you do not pay taxes on the funds if used for higher education but the rate right now is 3.5% with the average rate of inflation about that you will break even if your lucky. You would be much better off investing in a well established mutual fund for 18 years.

Good luck with your decision,
Ray

[PrincessPerky]

Well, financially other routes make sense, but in our case Gma likes her bonds, and it is a gift you takes what you gets.

However since she asked first you can try a simple "we were looking into funding a X, can we use the money you intended to spend for that instead?"

if the answer is anything other than "sure" don't worry about it, accept the bond with thanks.

[boosami]

The interest rate will be fixed, and compounded semi-annually. Earned interest will be subject to federal taxes when the bond is redeemed (if redeemed early you forfeit three months worth of interest). If issued to your child, it will not be tax free for use on higher education expenses.

There is an Education Bond program where the interest is excluded from taxation, but the bond has to be issued to you, not your child, and not everyone qualifies due to income and other restrictions.

A better option might be a 529 College Savings plan, a mutual fund held in your name for use on your child's higher education. Your contributions may be at least partially tax deductible (on your state taxes if you use a state plan). Additionally, your folks (or anyone else, for that matter) can contribute to it. Any withdrawls and interest are tax-free when using it for qualified higher education expenses. It's good for a number of things related to college (books, etc.), not just tuition. You can also redeem portions of it tax-free for any use if tuition is paid through a scholarship or similar program.

[Coleroo]

I don't particularly care for bonds at all, unless a large amount is being purchased. Perhaps that's because I'm young and haven't had the need to transition to bonds yet though. I'm still all about the growth factor where savings is concerned.

My husband's family seems to love them though.....when our baby was born, hubby's mom gave him a US saving's bond that will be worth $50 when it matures yyyyeeeeaaarrrrssss from now. Now hubby's dad wants to buy some bonds too. With inflation like it is, what is the point of doing that? Shoot, $50 isn't much in even today's economy. I'm thankful for their contribution, but it feels like such a waste to me.

I would much rather any money given to my child go into a 529 or a Coverdell...or even his HSBC savings account.

However, I will never tell my hubby's parents that I think bonds are a waste. They seem to hold them on a pedestal. Family peace is better than fussing about a pittance amount (now if they offered 10k in bonds, I might argue the point though and ask for a different arrangement than bonds..lol).

When there is a lot of time on the horizon like it will be for your twins, bonds are terrible, imho. Funds are a better way to go. So, if you think you can talk them into going a different route without any feelings being hurt, it might be worth it, but if it's only for a small amount, it might not be worth possibly hurting their feelings over.

[kork13]

I don't particularly care for bonds at all .... my hubby's parents .... seem to hold them on a pedestal.

I think you'd look to history for the answer to this one... i don't know all about it really well, but i think there was a monstrous "buy US bonds" propaganda campaign somewhere around the 40's through 60's timeframe.


Help your American troops stamp out the evil of the Third Reich.... buy US war bonds and invest in freedom.

[jIM_Ohio]

Family peace with my parents went out the door YEARS ago. No reason to worry about ruffling feathers, I've already plucked most of them off.

thx for replies thus far.

[ThriftoRama]

There is a section in Joseph HUrley's book "The Best Way to Pay for College" that deals with savings bonds. You may want to cruise by the library and pick that up. I think they are pretty underwhelming overall. There is no shame in suggesting they open a brokerage account (at a bank or wherever they hold their own money), and ask them to invest in a Vanguard fund of something for the kids.

[Like2Plan]

jIM_Ohio,


I give savings bonds 2big thumbs down right now.
EE bonds bought now are fixed at the time of purchase for as long as you own the bond and you are correct in that the interest paid is really low. Also, the tax treatment is not all that favorable (If you are only talking about a couple of bonds, it is no big deal). EE Savings Bonds In Depth

.

If they are issued in the twins name, the interest is taxed (federal, not state). If they defer the taxes on the earnings over the years, they could end up paying taxes at your rate. They passed new kiddie tax legislation which increased the child's age this is imposed through college (if they are dependants on your tax return). How does this work? In 2008 the first $900.00 of unearned income is not taxed. The second $900.00 of unearned income is taxed at the twins rate and above $1800 is taxed at your rate. (They increase this threshold every year). link to further explanation of kidde tax changes in 2008

If they are issued in your name, the interest may be tax free if used for qualified educational fees (I believe it is only tuition and fees) AND, it is income tested. This one gets a lot of folks--when their kids are little, they are just starting out and their income is lower. Over the years, they become very sucessful and they make too much money (for this write off). And, when it comes time to cash the bonds in, it is taxed at a much higher rate. AND, it is taxed on earnings accumulated over 18-20 years!
Tapping Tax-Free Savings Bonds for College
So, savngs bonds pay very little interest. If you defer it until college, these dismal earnings could end up being heavily taxed.

I know you don't like the idea of a 529 plan, but right now it solves so many problems which other financial instruments have when used for saving for college. There are so many investment options with 529s. As it currently stands, your parents could even be the account owners and the money saved would not be counted towards financial aid eligiblity (although this could change).