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Dr. Don Taylor, CFA, Bankrate.com advice columnistGifting savings bonds for children

Dear Dr. Don,
Both my younger brother and sister have newborns. Both of my siblings are financially irresponsible. I'd like to purchase savings bonds for their childrens' birthday and Christmas gifts. However, I do not want my siblings to have access to the bonds and possibly cash them.

Do I buy the bonds in my name with the newborns as a co-owners or the other way around? Do the newborns' parents have any legal right to the bonds? Should I keep the bonds in my possession? Also, I'd rather not be responsible for the federal income tax of these bonds.
-- Cautious Kevin

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Dear Kevin,
By not being purchased in the parents' names, your nieces and nephews may lose one of the biggest tax advantages of owning savings bonds, namely the Savings Bonds for Education program.

There are income restrictions on whether the parents qualify for this program, but if they do, the interest income is free of federal income taxes when redemption proceeds are used for qualified educational expenses. The education program is explained on the TreasuryDirect site.

Since that's not going to work for you, I'll give you another option. You can buy the bonds in just the children's names and just not give the bonds to the children until they're older.

You can do this by opening a TreasuryDirect account in your name and buying bonds for the children and holding them in the gift box area of your account. I checked with a representative at TreasuryDirect who assured me that the bonds can remain in the gift box until your nieces and nephews reach the age of majority.  

Since savings bonds are free of state and local taxation, and the federal income taxes due can be postponed until the bonds are redeemed or mature, holding the bonds in the gift box can work. Talk to a TreasuryDirect representative if you're uncertain about how to make these purchases for the children in your account.

I think a better approach would be to fund Section 529 qualified tuition plan accounts using your name as the account holder and the children's as the account beneficiaries. Account maintenance fees, investment management fees and investment choices will influence where you might want to establish these accounts. Savingforcollege.com has a lot of information on choosing a plan that meets your needs in this area.

To ask a question of Dr. Don, go to the "Ask the Experts" page and select one of these topics: "financing a home," "saving & investing" or "money."

Bankrate.com's corrections policy-- Posted: Jan. 18, 2007
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