I bonds are a type of U.S. government-issued savings bond. But many investors will tell you that they aren’t just another investment, they’re a gift that keeps on giving. These bonds adjust for inflation every six months, making them an ideal investment that grows over time to provide a stable financial backing for a child or grandchild. If you’re not sure whether this is the right investment to give as a gift, consider talking to a financial advisor.
What Are I Bonds?
I bonds, which is short for “Series I Savings Bonds,” are a type of savings bond issued by the United States Department of the Treasury. This type of financial investment is designed to help individual investors save money while providing protection against inflation.
I bonds are typically considered a low-risk investment option because they are backed by the government. These bonds have two main components that allow investors to earn money: a fixed interest rate and an inflation-adjusted interest rate.
The fixed interest rate is determined when you buy the bond and remains the same throughout the life of this investment. The rate is set by the Treasury and is set up to provide a base level of return.
The second I bond rate, an inflation-adjusted interest rate, is calculated semiannually. It’s based on changes in the Consumer Price Index for All Urban Consumers (CPI-U), which reflects the rate of inflation.
You can typically redeem an I bond after one year, but will lose three months of interest when you cash it in less than five years.
As an investor, you’re incentivized through the combined interest rates to hold your I bond long-term so that it can keep pace with inflation and protect the purchasing power of your investment. I bonds can be held for up to 30 years.
How Bonds Are a Good Investment for Children
I bonds can be good investments for parents or grandparents who are looking to save money for their children and grandchildren.
First, I bonds can be a steadier and more predictable investment than the stock market — it’s redemption value will not decline because it is backed by the U.S. government.
Second, I Bonds offer a unique advantage because their returns are indexed to inflation — the Treasury can adjust rates every six months with the aim of keeping pace with cost of living increases.
Finally, another benefit of buying I bonds for your children or grandchildren is the tax advantages. The interest is typically subject to federal income tax, but exempt from state and local taxes. And, if the funds from an I bond are used for qualified educational expenses, the interest may be tax-free.
For these reasons, I bonds can be a smart choice for parents and grandparents who want to gift their loved ones an investment that is structured to be financially secure and inflation-protected.
Buying a Gifted Bond Via TreasuryDirect
If you’re interested in buying I bonds, you’ll need to open a TreasuryDirect account. To do so, you will need to provide the following information, including:
- Your tax ID number (Social Security or Employer Identification Number)
- An email address
- A bank account and routing number
Once your account is set up, the steps to buy an I bond are simple:
- Go to your TreasuryDirect account
- Choose BuyDirect.
- Choose I bonds and then click submit
- Fill out the rest of the information
So how far in advance of gifting do you need to buy bonds? According to TreasuryDirect, purchases of savings bonds are generally issued to accounts “within one business day of the purchase date.” And if you buy a bond on a non-business day, it will be changed to the next available business day.
Purchasing I bonds for a child or grandchild can help provide a solid foundation for their financial future. However, it’s important to understand how they work and which goals they could help you reach.
Tips for Investing
- A financial advisor can help you make a long-term investment plan for your needs and goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- You can also use an investment calculator to help you estimate how much your money in your portfolio might grow over time.
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