Savings Bond purchase limits are complicated

(NOTE: As of January 1, 2008, the limit was reduced from $30,000 to $5,000.)

Financial columnist Terry Savage of the Chicago Sun-Times answered a question about Savings Bond annual purchase limits yesterday. In general his answer was correct, but there’s a catch here he missed. Here’s the question from his reader:

Q: I’ve been purchasing I Bonds for my children since 1999. I buy $30,000 under their Social Security number with myself as co-owner. Then I buy the same child another $30,000 and use my Social Security number with the child as co-owner. Hence I’ve bought $60,000 for each child per year. It’s $30,000 per year, per Social Security number, but by reversing the owner and number you can actually purchase $60,000.

To which Terry responds, in part:

After contacting a representative of the Savings Bonds office, I can tell you the limit is $30,000 per year per Social Security number. So your strategy works.

However, note the questioner is doing this for “children,” not for one child. The strategy would indeed work for one child. In that case there would $30K registered in the child’s SSN and $30K registered in the parent’s SSN.

But when there are two children, There would be $30K registered under each child’s SSN and $60K registered in the parent’s SSN. Whoops. Having a different co-owner on each set of these bonds doesn’t solve the problem.

Why hasn’t the Treasury called the questioner on this? The simple truth is that the Treasury doesn’t have a systematic process for detecting paper Savings Bond purchases over the $30K limit.

Should you try to take advantage of this? No, it’s a bad idea. While there’s no penalty for going over the limit, if it ever does develop a process for checking purchase limits on paper bonds, the Treasury could simply return the questioner’s money without interest, which wouldn’t be a happy day for anyone.

The standard answer to this question is that the best way to overcome the $30K limit is by purchasing both paper and electronic bonds. Each SSN is allowed to invest $30K per year in paper I bonds, electronic I bonds, paper EE bonds, and electronic EE bonds. Thus the total Savings Bond investment limit, per SSN per calendar (Jan-Dec) year, is $120,000.

In this case, however, all the I bonds after the first $60K would have to be registered using the children’s SSNs. This doesn’t solve the questioner’s problem either, because of the differences in what it means to be a co-owner in TreasuryDirect.

You can’t buy an electronic bond under someone else’s SSN on TreasuryDirect unless you also make that person the owner of the bond. In TreasuryDirect, the co-owner has much less control over the bond, so unless the questioner is willing to make an outright gift of that portion of the money, there’s not really any way to do this.