I-Bonds

Business— Recently we have started using I-BONDS (Series I Bonds) to supplement 529 plans. Although 529 contributions are subject to gift tax limitations, it is possible to put $60,000 in at a time per spouse per child, covering five years of contributions in advance. After five years, another contribution can be made.

I-bonds can also be used to pay for education, and therefore are another way to save for these expenses, tax-free. I-bonds are not subject to gift tax because they are not gifts. They are owned by the purchaser. They have the advantage of being state and local tax free, and if used for educational purposes, they are free from federal taxation. They have interest rate risk but no corpus risk. The interest rate is calculated every six months based on the change in the Consumer Price Index plus 1% guarantee and the interest is accrued. So the minimum they can earn is 1%. As of today, they are earning 6.73% but that will be changing in May. The maximum amount of I-bonds that can be purchased per year is $60,000--$30,000 from a bank and $30,000 on line by going to http://www.treasurydirect.gov/. These bonds work when more money is needed to fund educational needs but are not our first choice. 529 plans are still the first choice because there are more aggressive investment options available.