Key points
- You can buy inflation-protected Series I bonds in a child’s name.
- You can purchase an I bond for as little as $25.
- The interest earned on I bonds is subject to federal taxes.
Opening a birthday card with a savings bond inside was an annual tradition for many of us. It turns out the relatives who gave those bonds were on to something.
While not the flashiest gifts, I bonds are a safe investment designed to keep pace with inflation. They grow for decades and can provide kids with a source of cash as they transition to adulthood.
Today’s savings bonds are more likely to be electronic than paper. But they still make great gifts. Here’s what you need to know if you’d like to buy I bonds for kids.
What are I bonds?
I bonds are savings bonds that offer both a fixed rate of return and a variable rate tied to inflation. They’re an attractive option for those looking for a secure and inflation-protected investment.
The fixed rate for I bonds is announced May 1 and Nov. 1. It applies for the life of the bond to all bonds issued during the next six months. The current fixed rate on I bonds is 1.30%.
The inflation rate, which is related to the consumer price index, usually changes every six months. It’s also set May 1 and Nov. 1. The current inflation rate on I bonds is 1.48%.
The composite rate for I bonds issued between May 1, 2024, and Oct. 31, 2024 is 4.28%. That handily beats the average savings account, which is around 0.46%, according to April 2024 Federal Deposit Insurance Corp. data.
About I bonds for kids
Government-backed I bonds can outpace a traditional savings account. Plus, they provide the added benefit of the peace of mind that comes with low-risk investments. But how do you buy an I bond for your child?
The Treasury Department considers a child’s account to belong to the child and the child alone. But custodians, usually parents, are in charge until the child turns 18. Only then can the child access the account.
“Whether you wish it or not, management of the account reverts to the child at the age of 18,” said Lyle Solomon, consumer finance expert and principal attorney at Oak View Law Group. Then they can spend it however they want.
The custodian of the account can request withdrawals and manage the account until the child takes ownership.
How should I buy I bonds for a kid?
You can purchase anywhere from $25 to $10,000 in electronic I bonds. The annual cap for paper I bonds is $5,000. The only way to buy paper I bonds is with your IRS tax refund.
A caveat: If you purchase I bonds for a child in their name, that gift doesn’t count toward your annual limit. The limit applies to the gift recipient, not you.
Purchasing an I bond for a child
When purchasing an I bond for a child, you have a couple of options. You can buy it in your name and then gift them the cash once the bond matures. That’s easier, as the kid doesn’t need an account.
But if you’re concerned about your own annual limit, purchasing the bond in the child’s name might be a better choice. Buying the bond in their name requires some of the kid’s basic information.
- To buy an I bond in your name, you must set up an account on the TreasuryDirect website. Have your Social Security number and bank account information handy. Then go ahead and make your purchase.
- To buy in a kid’s name, you must have their full name and Social Security number. Create an account on the TreasuryDirect website or log in if you already have one.
The recipient must also have their own TreasuryDirect account. If they’re your kid, go ahead and set one up. If they’re not, you can keep the gift in your account until one is established for them.
Once you purchase the bond, you can deliver the gift to the recipient by going to your Gift Box and entering the recipient’s TreasuryDirect account number. You can also go the old-fashioned way and get a paper I bond.
Pros and cons of purchasing I bonds for a child
Purchasing I bonds as financial gifts for your children is a great way to save for their future and teach them about investing and saving at a young age. While I bonds are a great vessel for that, they also come with disadvantages.
Pros
- Low-risk investment.
- Designed to keep pace with inflation.
- Educational savings gift for future use.
- No commissions or account fees.
- Tax advantages.
Cons
- Lower rates of return than more aggressive investments.
- Requires opening an additional account.
- Minimal holding periods.
- Return rates fluctuate every six months.
- You must deal with the antiquated TreasuryDirect website.
When can a kid (or an adult) cash an I bond?
I bonds reach maturity in 30 years. But they can be redeemed for payout after you own them for at least one year. (There are exceptions for those who are affected by a natural disaster.) Cashing in your I bonds early will result in losing some of the interest your bond earned during that time. I bonds less than five years old will lose the last three months of interest the bond earned.
This means if you sell a bond that is four years old, you’ll receive only three years and nine months’ worth of interest earnings. When it comes to the child cashing in their I bonds, they won’t have access until they reach age 18. But what if you want to cash in your child’s I bond before their 18th birthday?
You can cash an I bond for a child if you meet these requirements:
- You are the child’s parent.
- The child is too young to understand a request for an I bond payment.
- The child lives with you or you have legal custody of the child.
Again, there isn’t a set time to redeem I bonds. But to avoid losing interest earnings, ensure you hold the bond for at least five years.
Frequently asked questions (FAQs)
Any interest your I bonds earn may be subject to federal income tax. But it will be exempt from state and local income taxes. When tax is paid depends on when you report the earned interest. You can report it yearly or defer reporting until you cash in the I bonds.
Interest used to pay for higher education costs may be exempt from federal income tax but only if certain criteria are met. You must meet an income guideline, and the bond must have been issued to someone 24 or older.
So if you want to buy I bonds for your child with the intent of receiving the educational tax exclusion, you should register the bonds in your name.
Buying I bonds electronically is the most convenient option in most cases. Of course, if you’re buying a bond as a gift, it can be nice to have something physical to give. Keep in mind that if you go this route, you won’t be able to buy as much as you can electronically.
“Adults can buy paper bonds of up to $5,000 for a minor child,” said Andrew Aran, a certified financial advisor and managing partner at Regency Wealth Management.
To do so, you must use your tax refund (otherwise, you can’t buy paper bonds) and fill out IRS Form 8888. Paper I bonds are issued in denominations of $50, $100, $200, $500 and $1,000.
Bonds can be a good way to help kids save for future expenses. They are guaranteed not to lose value and are intended to keep pace with inflation. Money from I bonds can come in handy as kids enter adulthood and look to make major purchases.
But I bonds may not be the best investment for college, particularly if you’re buying the bonds in your child’s name. Only bonds purchased by someone 24 or older will be eligible for tax benefits if the interest is used for higher education. Consider whether a 529 plan makes more sense.
Finally, keep in mind that I bonds must be held for 12 months before being cashed in. I bonds turned in before five years will lose three months’ interest. So bonds are best as a long-term investment.
Both you and your child will need TreasuryDirect accounts. Your child’s account will be linked to your own for management. You can purchase electronic I bonds in the linked account for your child.
If you’d like to buy paper bonds for your child, you’ll need to do so with your tax refund and fill out IRS Form 8888.
Electronic I bonds can be redeemed from within your child’s linked account on TreasuryDirect.gov. Note that if you’re cashing a partial bond, you must leave at least $25 in the account.
If you’re cashing a paper bond for a child, you must write specific information on the back of the bond. This includes the child’s age and Social Security number and your relationship to them. Specific details can be found on the TreasuryDirect website. Note that paper savings bonds must be cashed for their entire value.
