How to Buy I Bonds for a Child or Grandchild

Savings bonds for kids provide a reliable way to set aside money for the future while benefiting from government-backed security. I bonds, which are issued by the U.S. Treasury and earn interest that adjusts for inflation, are one option for your children or grandchildren. While not specifically designed for kids, adults can purchase I Bonds as gifts or hold them in a minor’s linked TreasuryDirect account. An adult must manage the funds until the child comes of age.

A financial advisor can answer your questions about bonds, portfolio management, estate planning and more.  

What Are I Bonds? 

The United States Department of the Treasury issues I bonds, short for “Series I Savings Bonds.” This type of financial investment helps 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: a fixed interest rate and an inflation-adjusted interest rate.

The Treasury sets the fixed interest rate when you buy the bond. It remains the same throughout the life of the investment. This rate is designed to provide a base level of return. The second component of an I bonds is its inflation-adjusted interest rate. The Treasury calculates this rate 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 with a penalty. If you cash it in before five years you will lose three months of interest. As an investor, you’re incentivized through the combined interest rates to hold your I bond long-term. This lets it keep pace with inflation and protects the purchasing power of your investment. I bonds can be held for up to 30 years.

Are Bonds a Good Investment for Children?

I bonds can be good investments for parents or grandparents to make for their children and grandchildren. First, I bonds offer a steadier and more predictable investment than the stock market. Their redemption value will not decline because they have the backing of the U.S. government. Second, the Treasury adjusts rates every six months to keep pace with cost-of-living increases. This keeps I Bonds returns indexed to inflation.

Another benefit of buying I bonds for children or grandchildren is their tax advantages. The interest is typically subject to federal income tax but is exempt from state and local taxes. And, if you use the funds from an I bond for qualified educational expenses, the interest may be tax-free. Overall, they provide a smart choice for parents and grandparents who want to gift their loved ones a reliable investment.

How to Buy Savings Bonds for Kids

You’ll need to open a TreasuryDirect account if you want to buy I bonds. 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 you have your account set up, buying an I bond is simple:

• Go to your TreasuryDirect account
• Choose BuyDirect
• Choose I bonds, then click “Submit”
• Fill out the rest of the information

How Far in Advance Should You Buy I Bonds?

According to TreasuryDirect, it issues purchases of savings bonds to accounts “within one business day of the purchase date.” If you buy a bond on a non-business day, the purchase date moves to the next available business day.

How I Bonds Compare to Other Savings Options for Children

I bonds can help you save for a child’s future, but you have other options. A 529 plan, for example, focuses on education savings. Contributions grow tax-free and withdrawals for qualified education expenses carry no federal tax. Non-qualified withdrawals trigger taxes and a 10% penalty on earnings. I bonds offer more flexibility. You can use the money for anything once redeemed. However, the education tax exclusion on I bond interest phases out at higher earnings levels. ¹ And 529 plans benefit from compound growth in a way I bonds do not.

UGMA and UTMA custodial accounts give families the broadest flexibility. They have no contribution limits, no restrictions on how you use the money, and no withdrawal penalties. However, once the assets transfer to the child you cannot take them back. When the child reaches adulthood, they can use the money however they choose regardless of the original intent. I bonds, by contrast, remain under adult control until the child takes ownership.

High-yield savings accounts offer immediate liquidity and predictable returns. However, they do not offer inflation protection or tax advantages. I bonds have a one-year lockup period and a three-month interest penalty before five years, ² which makes them less accessible but more rewarding for long-term holders.

Series EE bonds are the closest relative to I bonds within the Treasury’s own product lineup. EE bonds carry a fixed rate and are guaranteed to double in value if held for 20 years, ³ which implies a 3.5% annualized return over that period. I bonds do not carry that doubling guarantee but offer better protection in high-inflation environments since their rate adjusts with the CPI. For families uncertain about the inflation outlook over the next decade or two, I bonds carry less rate risk than EE bonds.

How an Advisor Can Help Use I Bonds as Part of a Broader Savings Plan

I bonds are straightforward to purchase, but fitting them into a larger financial plan may require professional guidance. A financial advisor can help you determine how best to use I bonds. If the goal is education funding, the comparison between I bonds and a 529 plan is not just about returns. It involves income eligibility for the I bond education exclusion, the impact of each account type on financial aid calculations and whether the flexibility of I bonds justifies the lower long-term growth potential compared to an equity-heavy 529 portfolio over a 15-year horizon.

For grandparents who want to give I bonds as gifts, an advisor can help structure the gift in a way that does not create unintended tax consequences or disrupt other estate planning strategies already in place. The annual purchase limit of $10,000 per person per year through TreasuryDirect ⁴ means that I bonds work best as one component of a broader gifting plan rather than a standalone strategy for larger transfers of wealth.

An advisor can also help parents think through the timing of I bond redemptions relative to a child’s other financial events, such as applying for college financial aid or reaching the age of majority. Redeeming a bond in a year when the child has significant other income, for example, could reduce or eliminate the education tax exclusion and increase the overall tax cost of the investment.

For families building a diversified savings plan across multiple vehicles, an advisor can map out how I bonds interact with 529 contributions, UGMA accounts and other assets to produce a plan that balances growth, flexibility, tax efficiency and control in a way that reflects the family’s actual goals rather than the strengths of any single product.

Bottom Line

I Bonds offer a way to save for a child’s future with government-backed security and inflation-adjusted returns. Any adult can purchase them easily through TreasuryDirect and manage them until the child reaches maturity. With predictable growth and potential tax benefits, they can be a practical choice for those looking to set aside money for education planning or other future needs.

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 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. 

Photo credit: ©iStock.com/evgenyatamanenko, ©iStock.com/Paul Bradbury, ©iStock.com/somboon kaeoboonsong