Key points
- Inflation-linked I bonds can make a fine gift for friends and family.
- The gift provides compound interest accrual over the life of the bond.
- The recipient will have to wait at least a year to cash in.
Cash tops many people’s wish lists. While it may be easy to slip a few bills in a card, you could do one better by gifting a savings bond.
Savings bonds may be considered less exciting. But they’re perfect for helping a friend or family member save for the future. Series I bonds have a competitive interest rate and are designed to ensure their value keeps up with inflation.
The process for gifting savings bonds isn’t all that difficult, as you’ll see below.
What is an I bond?
An I bond is a U.S. government-backed investment. It pays a combined rate comprised of a fixed rate and an inflation rate. The current fixed rate is 1.30%. The current inflation rate is 1.48%. That brings the current composite rate to 4.28%.
The inflation rate changes twice a year, in May and November. In times of barreling inflation, anything remotely protected from inflation looks pretty good.
If you purchase an I bond from May 1, 2024, to Oct. 31, 2024, you’ll get an annualized 4.28% return for the first six months. That’s pretty impressive.
Can I buy an I bond as a gift?
The U.S. government allows and even encourages people to give savings bonds as gifts. It provides more than 25 gift certificates that can be printed and presented to a recipient. These include gift announcements for babies, weddings and graduations.
“I bonds can be purchased for just about anyone,” said financial coach Michael Ryan. “You can buy them for yourself, your children or someone else as a gift.”
To buy an I bond as a gift, you must set up an account at TreasuryDirect.gov. Your recipient will need an account too. But they can create one after receiving the I bond. You’ll need the recipient’s full name and Social Security or tax ID number.
How many I bonds can I give someone?
I bonds can be a great gift. But they come with restrictions and limitations. “It’s a good idea to research and understand the terms and conditions before purchasing,” said Michael Schulman, chief investment officer at Running Point Capital Advisors.
Whether you purchase an I bond for yourself or another person, the cap per person per year is $10,000 in electronic bonds. But this cap is per recipient. That means you can buy $10,000 worth of electronic I bonds for yourself and an additional $10,000 for another person.
The only way to gift paper I bonds is to purchase them with your tax refund. You can buy up to $5,000 in I bonds per recipient this way. Paper I bonds are available in denominations of $50, $100, $200, $500 and $1,000. The minimum purchase amount for an electronic Series I bond is $25. They can be bought in any amount to the penny above that.
Recipients won’t be able to cash in their I bonds for 12 months. If they redeem their I bonds before five years, they’ll lose three months of interest.
What is the interest rate and the terms of an I bond?
The I bond composite interest rate in a combination of:
- A fixed rate, which remains the same for the life of the bond.
- An inflation-adjusted rate.
Interest is compounded twice a year. The updated interest rates are announced each May and November. But the date on which your I bond rate changes is based on its issue date. For example, if your I bond was issued in January, your interest rate will change in July and January each year.
Additionally, the maximum maturity on an I bond is 30 years. You can cash it in after a year. But if you redeem it within five years, you’ll lose the last three months’ interest.
How do I give the I bond to the recipient?
“There are a couple of different ways to give an I bond to someone,” Ryan said. One way, he explained, is to transfer the bond into the recipient’s name using the TreasuryDirect website once they sign up for an account.
After purchasing the I bond, you must hold it in your account for at least five days. This protects the Treasury Department from losing money if your payment doesn’t go through.
Once you’re clear, navigate to your Gift Box via the TreasuryDirect portal and enter the recipient’s account number to deliver it. TreasuryDirect will then send the recipient an email to announce the gift. You can also print out a gift certificate provided by TreasuryDirect so you have a physical gift to give.
I bond recipients can check the value anytime by logging in to their TreasuryDirect account and selecting the Current Holdings tab. For paper I bonds, they can use this calculator.
Can I buy I bonds for kids?
I bonds can be gifted to both adults and children. Kids under 18 will need someone to create a minor-linked TreasuryDirect account for them. The creator remains the account custodian until the child becomes an adult. At that point, they can delink their account and become the sole owner of the I bond.
Frequently asked questions (FAQs)
Yes, you can buy paper I bonds. But it isn’t very convenient. The only way to buy a paper I bond is by using your tax refund. Complete IRS Form 8888 when you file your taxes and ask for the I bond to be issued in that person’s name. You can purchase any multiple of $50. TreasuryDirect uses denominations of $50, $100, $200, $500 and $1,000.
Paper I bonds are capped at $5,000 per person per calendar year. But you can buy both paper and electronic I bonds for a total of $15,000.
Interest earned on I bonds is subject to federal income tax but not state or local income taxes. It’s also subject to federal estate, gift and excise taxes and state estate or inheritance taxes when applicable.
If you buy an I bond as a gift, the recipient is responsible for paying those taxes. Interest can be reported and taxed each year. Or the reporting can be deferred until the bond gets cashed.
One exception: If the interest is used to pay for qualified higher education expenses, it may not be subject to federal taxes. But other restrictions may apply for the withdrawal to be tax exempt. For example, only bonds purchased or received by someone 24 or older are eligible for the higher education exemption.
Yes, you can transfer I bonds to someone else. But you’ll both need TreasuryDirect accounts.
If you have a newly purchased I bond, you must wait five days before transferring it. Then, you can initiate the transfer using the Transfer Securities option on the Manage My Securities section of your account. You may be required to print, sign and mail a paper form to complete the transfer. If you’re transferring only part of a bond, you must leave at least $25 in your account.
If you have paper bonds, you may need to convert them to electronic bonds before transferring. To do so, you’ll need to create a Conversion Linked Account within your primary TreasuryDirect account.
The government limits electronic I bond purchases to $10,000 per year. You can buy an additional $5,000 in paper I bonds annually using your tax refund. In both cases, the limit is based on the Social Security number of the first person named on the bond registration.
Whether it’s a good idea to buy I bonds for a child depends on your goals for the investment. An I bond can be a safe way to set your child up with funds for a house, wedding or similar expense.
But if you’re considering using I bonds as a college fund, think twice. Bonds purchased in a minor’s name will not be eligible for a tax exemption for higher education costs. Instead, buy the bonds in your name or consider whether a 529 college plan is a better option.
