Dear Dr. Don,
My 7-year-old daughter has received an inheritance of $10,000. What is a safe $10,000 investment that would guarantee her a decent return between now and when she turns 18? Thanks.
-- Edwin Accretive
I'm assuming you're controlling the funds in a Uniform Gifts to Minors Act or Uniform Transfers to Minors Act account for your daughter's benefit. As the custodian you would have a fiduciary duty to your daughter, meaning that you must put her interests first when investing the money.
Given the parameters you place on the investment, I'd lean toward U.S. Series I savings bonds. There's an annual purchase limit of $10,000, which dovetails nicely with the amount of money she has to invest.
A Series I savings bond earns the prevailing rate of inflation based on changes in the consumer price index. That yield changes every six months. The yield for the first six months on a Series I savings bond purchased between Nov. 1, 2012, and April 30, 2013, is 1.76 percent. The Series I savings bond also has a fixed-interest yield component, but that has been at zero percent for the past two years. The fixed component stays the same over the entire 30-year potential term of the bond.
If you pick a Series I bond, it would also make sense to choose accrual-basis tax reporting on the interest earnings. With accrual-basis reporting, you report interest each year as it accrues instead of deferring taxes until the bond is cashed in or matures. Once you start with accrual-basis reporting, you must continue to report interest earned every year for all savings bonds and notes that you own. That includes future purchases as well.
I'd consider splitting the inheritance between an investment in the Series I savings bonds and an investment in the stock market. While the savings bond investment is very safe and will keep pace with inflation, the stock market investment has the possibility of building wealth versus just treading water and preserving the purchasing power of her inheritance. A no-load indexed mutual fund, or an exchange-traded fund invested in a broadly based stock market index, could be just the ticket.
Investing in a Section 529 college savings account is an alternative, but that presumes that the money will be used to pay for her college expenses. That may not have been the intent of the decedent. The advantage of investing in a Section 529 account is in how the money is considered if she applies for financial aid for college, at least under current financial aid rules.
Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.
Ask the adviser
To ask a question of Dr. Don, go to the "Ask the Experts" page and select one of these topics: "Financing a home," "Saving & Investing" or "Money." Read more Dr. Don columns for additional personal finance advice.
More From Bankrate.com