Is it a good idea to buy I bonds for a child?
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 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.
Cons of Buying I Bonds
I bonds are meant for longer-term investors. If you don't hold on to your I bond for a full year, you will not receive any interest. You must create an account at TreasuryDirect to buy I bonds; they cannot be purchased through your custodian, online investment account, or local bank.
Reporting the interest every year
For example, you may find it advantageous to report interest every year on savings bonds in a child's name. The child may be paying taxes at a lower rate than will be true years later when the bond matures. But you will not get a 1099-INT every year.
So are I bonds worth it? Whether I bonds make sense for you depends on your goals. If you only want to beat inflation, they'll ensure that you succeed. But if their $15,000 annual investment ceiling, withdrawal restrictions and interest rate uncertainty are turn offs, there are alternatives.
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.
The only time I bonds may escape federal taxes is if the money is used to pay for higher education. Among the many criteria you must meet to take the tax exclusion, your income must be under certain limits and you must apply the money to a qualified institution the same year you redeem the bond.
I-bonds are also attractive because investors bear almost no risk of losing their principal. The composite rate can never be less than 0%, even during deflationary periods when the inflation rate is negative.
I bonds issued from May 1, 2024, to Oct. 31, 2024, have a composite rate of 4.28%. That includes a 1.30% fixed rate and a 1.48% inflation rate. Because the U.S. government backs I bonds, they're considered relatively safe investments.
Bottom line. I bonds, with their inflation-adjusted return, safeguard the investor's purchasing power during periods of high inflation. On the other hand, EE Bonds offer predictable returns with a fixed-interest rate and a guaranteed doubling of value if held for 20 years.
Will I get a 1099 from TreasuryDirect?
If you invest in TreasuryDirect, your 1099 will be available electronically and you can print the form from your account. 1099 forms are available by January 31 of each tax year.
In general, you must report the interest in income in the taxable year in which you redeemed the bonds to the extent you did not include the interest in income in a prior taxable year.
Can I cash it in before 30 years? You can cash in (redeem) your I bond after 12 months. However, if you cash in the bond in less than 5 years, you lose the last 3 months of interest. For example, if you cash in the bond after 18 months, you get the first 15 months of interest.
Key Points. Pros: I bonds come with a high interest rate during inflationary periods, they're low-risk, and they help protect against inflation. Cons: Rates are variable, there's a lockup period and early withdrawal penalty, and there's a limit to how much you can invest.
TIPS offer greater liquidity and the higher yearly limit allows you to stash far more cash in TIPS than I-bonds. If you're saving for education, I-bonds may be the way to go.
Holding a bond to maturity does come with an opportunity cost: If rates rise while you're holding the bond, you could miss out on the higher coupons offered by newer bonds on the market.
We currently sell 2 types of savings bond: Series EE and Series I. You can buy them for yourself, your child, or as a gift for someone else. This page focuses on buying for yourself or a child whose account is linked to yours.
| Face Value | Purchase Amount | 30-Year Value (Purchased May 1990) |
|---|---|---|
| $50 Bond | $100 | $207.36 |
| $100 Bond | $200 | $414.72 |
| $500 Bond | $400 | $1,036.80 |
| $1,000 Bond | $800 | $2,073.60 |
- College Savings. Helping a child save for college can help reduce the amount they may one day have to borrow in student loans. ...
- Shares of Stock. ...
- Custodial Account. ...
- Certificate of Deposit. ...
- Savings Bonds. ...
- Donation to a Charitable Organization. ...
- Prepaid Debit Cards. ...
- IRA Contribution.
For those who bought I bonds for the first time or just need a quick reminder, know this: All that interest income is taxable as regular income. If you cashed in, you need to report the interest on your tax return even if finding a 1099 for I bonds is more complicated than other investments.
Can I use my tax refund to buy I bonds?
You can use all or part of your tax refund to purchase I bonds. Your request for bonds must be in increments of $50. Any remaining refund amount not used to purchase bonds will be mailed to you as a paper check or you may elect to have the remaining amount direct deposited into a checking or savings account.
Interest from corporate bonds is generally taxable at both the federal and state levels. Interest from Treasuries is generally taxable at the federal level, but not at the state level.
Securities purchased through TreasuryDirect cannot be sold in the secondary market before they mature. This lack of liquidity could be a disadvantage for investors who may need to access their investment capital before the securities' maturity.
The composite rate for I bonds issued from May 2024 through October 2024 is 4.28%.
There is nothing that will definitely go up if the stock market crashes. Interest bearing investments such as money market funds will continue to earn interest. Bonds may hold their value or increase, and individual bonds including Treasury's will continue to earn interest.
