Giving the right gift for the holidays can be a challenge, especially when it comes to kids. You want to give them what they want – a toy, video game, and of course the tried-and-true gift, money — but where’s the fun in just giving them cash? Well, if it’s money they want, a CD is a great spin on a monetary gift that provides them with savings for the future.
Here are the steps you can take to gift a CD or gift funds to open a CD for the kids and grandkids in your life not just for the holidays but all year round:
Find a Financial Institution That Offers Custodial Accounts with Good CD Rates
Custodial bank accounts allow an adult (parents, grandparents, aunts, uncles, friends etc.) to open a bank account – in this case a certificate of deposit – for a child. The adult (18 years or older) will oversee the account until the child reaches a certain age – the age of majority. The age of majority for custodial bank accounts can range from 18, 21, or 25 years old, depending on the state you live in.
Open a Custodial Account for Your CD
Depending on the financial institution, they will open the CD as a custodial ownership Uniform Gift to Minors Act (UGMA) or a Uniform Transfers to Minors Act (UTMA) where the CD funds be irrevocably gifted to the minor and will only be used in the best interest of the minor (i.e. to buy a car, get an apartment, etc.) before the age of majority or paid to the minor when they reach the age of majority.
You will need to provide the following documents and/or information to your institution of choice:
- Child’s information (i.e., social security number, birth date, and/or school ID or passport – not necessary but if it’s available)
- Adult’s US ID (i.e., driver’s license or passport)
- Adult’s social security number
Confirm with the institution where you’re opening the account all documents and information needed to open the custodial CD account.
The Gift of CDs May Not Be Immediate, But Patience Pays Off
Once your child has reached the age of majority, any funds under a Custodial UGMA or UTMA ownership should be turned over to the minor. This is as simple as having the Financial Institution change the ownership of the CD into the minor’s name when they have reached adulthood. Or cashing in the CD and paying the funds to the minor. By changing the CD to the now non-minor, they can keep the CD open and continue to earn an interest rate on funds for their future needs.
Final Takeaway
Gifting a CD or gifting funds to open a CD for a child at an early age provides them with a financial foundation with guaranteed returns, earned interest, safety, and most importantly the ability to instill good financial habits. They can begin setting aside a portion of their allowance or monetary gifts into CDs or savings accounts, which will give them firsthand experience of what it takes to manage their money responsibly and learn the power of compound interest, a gift of financial discipline for years to come.
FAQs
Can I Give a CD to an Adult?
Technically no. You cannot directly buy or give a CD to an adult because financial institutions require personal information and documentation to open an account under an adult’s name. Adults must open an account for themselves. If your adult children or grandchildren agree to accept your gift of funds to open a CD, what’s a better outing than a trip to the bank together or a shared online banking session to transfer funds and open an account on a digital banking platform?
Do I Pay Taxes on a Gift CD?
If you give money – CDs included — to someone, the Internal Revenue Service (IRS) assesses a gift tax if the gift exceeds the federal limit. In 2023, you can give up to $17,000 to as many people as you want without having to worry about paying the federal gift tax. And, if you’re married, your spouse can also give $17,000 to the same people. Between you and your spouse, that’s a total of $34,000 in 2023.
If your gift is greater than the federal gift tax allows, as a donor, you are responsible for paying the tax versus the recipient who received the monetary gift. However, in some cases, if you gift money to your child and the amount does not exceed the maximum allowable gift, you may be able to avoid paying taxes. The IRS reviews the exclusions for gift taxes annually, so it would be best to consult a tax professional before gifting a CD.
How do I gift a CD to a Child?
Find a financial institution that offers both custodial ownership and a good CD rate. CD Valet is an online marketplace that connects consumers with financial institutions to compare and open CDs with the best rates and terms nationwide. And just like many retailers’ offer of holiday promotions, banks, and credit unions offer CD “Promos” with particularly attractive interest rates to entice savers to open accounts with them.
Next, provide documents and information for both you and the child to open the investment account. As the parent, grandparent, or guardian of the child, you will be named the custodian of the account until the child reaches the age of majority – typically between 18 to 25. Once they have reached the age of majority, the child will have access to the account and all the funds within the account. The bank will ask the custodian to change ownership or close the CD. If for some reason, the custodian and minor are no longer in contact, the bank will seek counsel from the legal team before turning over funds directly to the minor.
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