Key points
- You can buy inflation-protected Series I bonds in a child’s name.
- The amount you can purchase electronically for anyone, including a child, is capped at $10,000 per person per calendar year.
- The interest earned on I bonds is subject to federal taxes in most cases, but not state or local taxes.
Looking for a gift for your 8-year-old niece? Why not try an I bond issued by the U.S. Treasury? Sure, she’d probably prefer the newest Lego Friends house, but she’ll love you once she can cash in on that bond.
The truth is you can buy an I bond for your child or anyone else’s — and you can purchase them for as little as $25. You’re essentially loaning Uncle Sam money when you buy one of these bonds.
So let’s break down how you can go about it, and why it’s an inflation-safe bet in an increasingly uncertain economic world.
What are I bonds?
I bonds are savings bonds that offer both a fixed rate of return and a variable rate tied to inflation, making them an attractive option for those looking for a secure and inflation-protected investment.
I bonds are a combo of fixed rates and inflation rates. The fixed rates for I bonds are announced every six months: May 1 and Nov. 1, and that rate applies to the I bonds issued for the next six months. That rate never changes. Currently, the fixed interest rate on I bonds is 1.30%.
The inflation rate, which is related to the Consumer Price Index, usually changes every six months, too, and it’s set at the same time: May 1 and Nov. 1.
Currently, the I bond rate for bonds issued on or after Nov. 1, 2023, is 5.27%. That handily beats the average savings account, which is around 0.46%, according to October 2023 FDIC data.
These government-backed bonds can outpace a traditional savings account with the added benefit of the peace of mind that comes with low-risk investments. But how do you secure an I bond for your children?
The Treasury Department considers a child’s account to belong to the child and the child alone. Although custodians, usually parents, are in charge until the child turns 18. Only then can the child access the account, which to them will seem like eons away.
“Whether you wish it or not, management of the account reverts to the child at the age of 18,” says Lyle Solomon, consumer finance expert and principal attorney at Oak View Law Group in Auburn, California. 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?
First, you can purchase anywhere from $25 to $10,000 in electronic I bonds. The annual cap for paper I bonds is half that at $5,000 per year, and those can only be purchased with your IRS tax refund.
And a caveat: If you purchase I bonds for a child in their name, that gift doesn’t count toward your annual limit. The limit is applied to the gift recipient, not your own.
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 wouldn’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 alternative. If you buy the bonds in their name, it requires some of the child’s basic information.
- To buy an I bond in your name, you first need to set up an account on the TreasuryDirect website. Have your Social Security number and bank account information handy for this. Then go ahead and make your purchase.
- To buy in a kid’s name, you’ll need 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 it’s your kid, go ahead and set one up. If it’s not your kid, 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 your 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 | Cons |
|---|---|
| Low-risk investment. | Lower rates of return than more aggressive investments. |
| Educational savings gift for future use. | Requires opening an additional account(s). |
| No commissions or account fees. | Minimal holding periods. |
| Tax advantages. | Return rates fluctuate every six months. |
| You have to deal with the antiquated TreasuryDirect website. |
When can the kid (or 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. (Although, 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 will 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 18 years of age. But what if you want to cash in your child’s I bond before their 18th birthday?
Any adult can cash an I bond for a child if they meet these few 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 any I bonds. However, to avoid losing interest earnings, ensure you hold the bond for at least five years.
Frequently asked questions (FAQs)
In the long run, any interest your I bonds earn may be taxed at some point. When that happens will vary depending on when you report the earned interest and on your personal tax situation. You can either report it yearly or defer reporting until you decide to cash the I bonds in at a date in the future.
Whenever you choose to redeem your I bond, the interest earned will be subject to the federal income tax rate that you have on the year you file. The only way around not paying taxes on I bonds is through qualified education expenses.
To avoid taxes, you must meet these requirements:
- Be 24 years or older when the I bond is issued to you.
- Your modified adjusted gross income is less than the cut-off amount for the tax year that you filed.
- The I bond was cashed in the same tax year you claimed the education exclusions.
- You paid higher education expenses during the tax year you claim exclusions.
- The expenses were for you, your spouse or your legal dependant.
According to the TreasuryDirect website, the only way to avoid taxes on I bonds for educational purposes is when you receive those bonds on or after your 24th birthday.
For that reason, if you want to buy I bonds for your child with the intent of receiving the educational tax exclusions, you must register the bonds in your name, not the child’s 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,” says Andrew Aran, a certified financial advisor and managing partner at Regency Wealth Management in Ramsey, New Jersey.
To do so, you must use your tax refund (otherwise, you simply 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.
