So my wife and I have decided to start putting the $1000 per child we get from the gov into bonds for the children. Right the money is "mixed" in with ours and we pay tax on it.
I have 2 questions, and both are related to the type of savings bond I should be getting.

The first part of my question is, do any fed bonds report their interest yearly? The point of this would be to pay taxes on the money in increments (or not pay as our children have no other income, and I don't think we will be getting close to the maximum interest income for minors level). So when the bonds are cashed out there will be no worries at that time about the tax man.

The second part is what bonds make the most sense to buy and to hold for 20-30 years? I plan to buy about $3200 in bonds for the two kids right away. and then I'll drop their next tax credit in when I get it. A 30 year I bond seems ok, but the low fixed rate bothers me (compared to older rates) TIPS are a bit better, but I can't figure out how the inflation part is factored in. And then there are all the bills and notes that I could just renew every few years (these can be held in my "gift box" too right?)

I am also open to any other ways of saving for my kids. Please note this is not money for their education. It is planned to be a "gift" at some point later in their life (wedding/graduation/first car or house helper etc.)

Thanks

officeboy said:
The first part of my question is, do any fed bonds report their interest yearly? The point of this would be to pay taxes on the money in increments (or not pay as our children have no other income, and I don't think we will be getting close to the maximum interest income for minors level). So when the bonds are cashed out there will be no worries at that time about the tax man.
With both EE and I Savings Bonds, you have the option of either paying tax on the interest every year or waiting until maturity.

To elect to pay taxes on the annual growth, your child will have to file a federal income tax return. Attach Schedule B to the tax return and show the interest earned for the year. Then write a statement on Schedule B that says something like "I elect to report the interest on U.S. Savings Bonds on an annual basis." Note that you will have to report the interest on ALL savings bonds annually and if your children already own any bonds, they will have to report all of the accumulated interest on those bonds since they were issued and then report any additional interest annually. Then fill out the rest of Form 1040 and if the amounts are small enough, the total due will be zero, but you still have to send in the forms.

You may have to fill out the tax return by hand, since I don't know of any tax software that is designed to handle this and your tax software may refuse to generate a Schedule B because the amount of interest is too low.

After the first year, if the child's income is below the minimum filing threshold, you won't have to send in any tax returns, but you should calculate how much interest is earned every year anyway and keep track. Be careful, as your children grow older they may have additional bonds, savings accounts, or summer jobs. Don't forget to count the savings bond income each year to determine whether they need to file a return and pay taxes.

If you would later like to switch from annual reporting to deferring taxes on savings bond income, that is possible, too.

For more information, read the section on Savings Bonds in Publication 550.

You want to give your kids the ultimate financial gift? Wait until you have at least $5k to work with and then go to this site. The money will grow free from taxes and it can't be touched by creditors.

http://www.ricetrust.com/

You are right to be sceptical about this so called RIC-E trust. It appears to be nothing more that a variable annuity inside an irrevocable trust. There is nothing unique and non-obvious about this (just goes to show you can patent anything). This basic idea has been around for years. Not that you would want to, but if you really wanted to do this use your own lawyer for the trust and a low cost provider such as Vanguard for the variable annuity..

Let us get back to your original question. Using the choices you provided, I would consider the following; While the tax liability is at or below the child rate (currently $1700 = $850/0%, $850/10%), Purchase twenty year TIPS bonds. When the tax liability exceeds the child rate, Purchase I-Bonds and defer the interest.

This has several advantages
1. Claim income when the tax rate is 0%/10%
2. Defer income what tax rates are higher (especially parents marginal rate).
3. Take advantage of the TIPS premium over I-Bonds rates.

Note: TIPS pay only the fixed rate on the coupon. The inflation component increases the value of the bond. However, you have the tax liability each year for both. If you want to get some compopunding on the TIPS, use the interest payments to buy I-Bonds.