With inflation extraordinarily high, and interest rates on general accounts quite low, you may be asking yourself “how can I buy more I-Bonds?”
I-bond rates right now are over 9%. Unfortunately, the amount you can purchase is capped at $10,000/individual. So you can only purchase $10,000/year in I-Bonds. If you’re married, your spouse can also purchase $10,000.
We use I-bonds as part of our cash management/long-term emergency savings fund. Since you can cash the bonds in at any time after holding for 12 months, and have to just pay a 3-month interest penalty on them (when held for under 5 years); it’s a great way to keep long-term emergency savings.
Side note, I wouldn’t recommend putting all of your emergency savings into I-bonds though as if you need some cash super quick, you will want to have it in an easily accessible account as while I haven’t redeemed an I-bond, I suspect the process could take up to a few weeks.
So, what do you do if you want to put more than $10-20k/year into I-bonds? If you have children, you can buy your kids I-bonds as a gift.
How to Buy I Bonds for Kids
Here are step by step instructions for how to buy I Bonds for your kids.
- First sign into your Treasury Direct Account.
- Within your Treasury Direct Account you set up your kids account. It’s a very straightforward process – you just need their social security numbers and birthdays. Then you can apply all of your account information for them. (Eg addresses and bank account). Here are the specific steps you follow:
- Log into your primary TreasuryDirect account.
- Click the ManageDirect tab at the top of the page.
- Under the heading Manage My Linked Accounts, click “Establish a Minor Linked Account”.
- The Establish an Account for a Minor page will appear.
- Complete all of the information for the minor (the minor’s Middle Name or Initial field is optional).
- Complete the Give Your Account a Name field.
- Select Use my Primary Account Information if you want to use the account address and contact information or you may select Enter New Account Information.
- The Bank Information displays from your primary account. Instructions are provided if you choose to change the Bank Information once the minor account has been established.
- Read the statements in the Taxpayer Identification Number Certification box, check the box indicating you agree with the statements, and click “Submit”.
- On the Review page, review the Account Information.
- Click “Edit” to go back to the previous page to make corrections.
- When the Account Information is correct, read the Certification statements and click “Submit”.
- Then within their account, you buy them $10,000 (or whatever the value is) worth of I-Bonds, just as you would for yourself.
Yes, it’s that easy.
So What’s the Catch? The Money Belongs to Them
You are probably asking yourself – what’s the catch? The catch is that this money belongs to your child. You have gifted them $10,000 which they are now entitled to. (Note that if you are giving your children money otherwise during the year, ensure that you aren’t going above the gift exemption threshold for the year. If you have a large amount of wealth and have trusts, etc. set up, ensure you speak with your estate planning attorney before making any I-bonds purchases.)
So, when your child turns 18, this money belongs to them. In addition, all of the interest belongs to them.
What if Your Child is Under 18 and You Want to Buy them I-Bonds
If your child is under 18, you can still buy them I-Bonds. In addition, as his/her/their parent/guardian, you have the right to direct how their money is spent for their benefit. This means, that when you redeem the I-Bonds, the money belongs to your child, but you can spend it on them
In this case, my children are quite young – 7 and 10. When it comes time to redeem these bonds, there will be plenty of expenses for them yet – including camps, sports, school, etc. If I redeem the bonds before they turn 18, I can use the funds and the interest earned to buy them things they want and need.
You can also use them to get started on teaching your kids about money. (Here’s my post about 10 things to teach kids about money before they turn 10.)
Your Child Will Need to Pay Taxes On the Interest Earned on the I-Bonds
Note also, your kids will need to pay taxes on the interest when the bonds are redeemed. (Unless it’s being used for school.) So if the interest accumulates to more than the maximum income amount allowed by the IRS (currently $1100), they will need to pay taxes on it. Once it’s above $2,200, each child will have to file their own returns. So you may want to redeem the bonds early, or wait until they are being used for school. (IRS Publication 929 explains these rules).
The Bottom Line: How to Buy I Bonds for Kids
Given the current inflation rate, purchasing I-Bonds for my children made sense to me. We will decide as they accumulate interest whether to redeem sooner so as to avoid paying tax; or to wait until they are in college and use the funds to pay for college.
Either way, if you are looking for a way to buy an extra $20,000 in I-Bonds this year at a very high interest rate (or more if you have more than 2 kids), buying I Bonds for your children may be the best bet.