Help me think this through.....daughter's ibonds

[kanga1]

I bought $10,000 worth of ibonds in 2021, 2022 and 2023 for my daughter currently worth $33,024. Now that she is 15 and has a job and there are other options with high interest like CDs and HYSA I was going to cash out most of them (2023 purchase I know can't cash out until January) open a ROTH IRA and put the rest in a HYSA or CD, she doesn't have a 529. Then I realized she would have to file a tax return if she has unearned income of $1250 or higher and I don't want to deal with that. I am leaning towards just pulling out $6000 to fund a Roth but if anyone has any other suggestions I will take them. 

[Cheerio]

Sorry, I don't have any advice on where to put the money, but does she have at least $6k of earned income for 2023? She can't contribute more than her earned income in a Roth IRA.

[kanga1]

Dec 15, 2023 12:58:13 GMT -5 Cheerio said:

Sorry, I don't have any advice on where to put the money, but does she have at least $6k of earned income for 2023? She can't contribute more than her earned income in a Roth IRA.

Yes she'll have about $7500 on her W2. In 2023 they actually raised the roth limit to $6500 so I was just going to do that. 

[mainelyfoolish]

The first $1250 of the child’s unearned income is not taxed, but the next $1250 in unearned income is taxed at the child’s tax rate, which, if their total income is low enough, is still zero. So it looks like you could cash out around $20k of the bonds without worrying about paying taxes on it this year.

As far as what to do with the money you cash out — what are your plans for it for the next few years? Is it supposed to go to future after high school expenses, is it money to help set her up later in life but you have have no specific plans, or something else?

If you don’t think she’ll need to use the $6k anytime soon, the Roth IRA would be a great gift to get her started on retirement savings and it’s still accessible in case of a dire emergency.

If you think she’ll need the money in two or three years, the CD or HYSA sounds like a good plan.

If you’re not quite sure when she’ll need the money in the future, you could look at re-buying $10k of I-bonds next year because right now the I-bond rate is 5.27% which is on par with CDs and HYSAs, but the fixed rate part of that figure is 1.3% which is higher than it’s been in many, many years. That means that no matter what inflation does in future, your I-bond will pay no lower than the calculated rate of inflation plus 1.3% for thirty years. If we get back to a point where inflation is zero and HYSAs are paying 0.3% interest, I-bonds you purchase during this Nov-May period will still be paying 1.3%. Last month I chased out $10k in I-bonds that I had purchased in 2021 with a 0% fixed rate and re-purchased the I-bonds at the new rate. I did sacrifice 3 months of interest for redeeming before 5 years, but I’ll make that back quickly with the higher rate. A small disadvantage is that I can’t redeem the new bond for year, but I have other savings that I can use if I need to in the meantime.

[kanga1]

mainelyfoolish, thank you for your input, I didn't realize the fixed rate went up on ibonds. Now I have even more food for thought lol.