Ask Money

Seeking some sizzle

Chris Farrell Mar 22, 2011

Question: Hello! I have 3 nieces and a nephew that my husband and I have been buying savings bonds for each Christmas for the past few years. We have been buying e-bonds (I think) where you pay half the face value. I think my sister’s children have 529 plans, but my sister-in-law’s daughter does not. So our questions are: how can we invest for them that will get us – and them – the biggest bang for our buck? Also, we don’t necessarily want the money to be tied to their going to a traditional 4-year college, so that it could be used for maybe a trade school or other training program. Any help would be greatly appreciated!! Thank you, Kate, Aurora, IN

Answer: I like what you’re doing. Series EE savings bonds or I-bonds, their inflation-protected sibling, are a good financial gift. They don’t offer much bang for the buck, that’s for sure. It’s a plodding investment. No sizzle at all.

But there are no commission costs to buy and sell them. There’s no credit risk. Taxes are deferred until the bonds are cashed in. Taken altogether, the money you give them now will be there in the future when they need it. And that means a lot in an uncertain world.

When your nieces and nephews are old enough they can spend the money on what they think is important to them.

By the way, some people don’t like this approach because when they’re young adults are free to spend the money anyway they please. You may have gifted it to them to help out on their education, for instnace, but they may want to buy a car, open a restaurant, or start a social network. It’s their choice, not yours.

It sounds as if you’re okay with that. I know I am. I think the problem is exaggerated. Most students going to college are well aware of the steep price tag. If they know they have been given money for their education they’ll contribute their share when the time comes.
And if college is not their path, there’s nothing wrong with starting a business or whatever moves them.

You can get a more bang for your buck by putting money into a 529 college savings plan (and get your sister-in-law to open up an account). You’re right that the money in a 529 has to go toward qualified educational expenses to get the benefit of tax-free withdrawal. It’s a less flexible option. But the money doesn’t have to go toward a 4-year degree. For example, the 529 savings can be spent tax-free at a community college and technical college, too.

In other words, money in the 529 will be limited to their postsecondary education, but there are a wide range of institutions that qualify for that designation.

What else? You could also buy them a low-fee broad-based equity in index fund or a comparable balanced fund that mimics the U.S. market (60% stocks and 40% bonds). It’s a bet on the long-term health of the U.S. economy. There is greater risk to this investment, which means a greater chance for sizzle (such as the market in the ’90s) or a shortfall (the story of the 2000s).

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