Alternatives to Savings Bonds for Kids

by Mike Parker

    Series EE and Series I savings bonds are one of the few investment securities children can own in their own names. The full faith and credit of the U.S. government backs the interest and principal on U.S. savings bonds, making them among the safest of all investments. Although savings bonds can give your child a good financial foundation, you might consider some alternative investments.

    A savings account at your bank is one alternative to U.S. savings bonds for your child. A savings account and savings bonds share a number of the same qualities, but have some significant differences. The Federal Deposit Insurance Corporation insures deposits in savings accounts at most banks up to maximum limits, so your child's money is safe. Savings accounts, like savings bonds, traditionally pay low interest rates. Minor children can't have bank savings accounts in their own names, however, so adults must be cosigners.

    Minor children can't own most securities, such as stocks, bonds or mutual funds, but you still give securities to children through the provisions of the Uniform Gift to Minors Act. You'll have to set up custodial account to receive the securities and appoint a custodian or trustee to oversee the account. Once you gift money or securities to the account, those assets belong irrevocably to the child, but control of the account remains with the trustee until the child reaches majority, usually between age 18 to 21, depending on state law.

    Anyone who has earned income can have a Roth Individual Retirement Arrangement, regardless of age. Some financial institutions offer Roth IRAs to minors with minimal initial investment requirements. A child can contribute earned income, up to $5,000 per year as of the 2012 tax year, into a Roth IRA. All of the conditions and restrictions of a Roth IRA, including tax penalties for non-qualified withdrawals, apply to your child's Roth IRA.

    The Internal Revenue Service considers income not exempted by law from taxation to be taxable income; that includes the interest, dividends and capital gains produced by your child's investments. Children must file federal tax returns when their income from U.S. savings bonds, bank savings accounts and other securities exceeds the standard deduction, which was $950 for unearned income, as of the 2011 tax year. Children must also file if their combined earned income and unearned income exceeded $950, with more than $300 in unearned income, or if they had more than $5,800 of earned income.

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    About the Author

    Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.

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