A step-by-step guide for how to buy a CD as a gift

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• You can buy a CD as a gift for a minor, but you can’t give a CD to another adult.
• You’ll have to open an UGMA or UTMA account, then add a CD.
• When you’re choosing a CD, consider interest rates and early withdrawal penalties.

Buying a CD as a gift can be a good option for parents or close relatives who want to help teach kids about saving money for the future.

If you are considering buying a CD as a gift, here’s everything you need to know about getting an account on another’s behalf.

Can you buy a CD as a gift for another adult?

No, you won’t be able to buy a CD and give it to another adult. Financial institutions require personal information and documentation to establish account ownership. Adults have to open accounts on their own behalf. 

You also can’t directly transfer ownership to another person once an account is open in your name. The most you’ll be able to do is open a CD under joint account ownership. 

How to buy a CD as a gift to a minor 

While you cannot buy a CD as a gift for an adult, you may get a CD as a gift for a minor. Parents or close relatives can open an account on behalf of a child because minors cannot open a bank account on their own.

Here is a step-by-step guide you can take to buy a CD as a gift for a child: 

1. Find an institution that offers a custodial account.

A custodial bank account is a type of investment account a parent or guardian can open for their child. The parent or guardian will oversee the account until the child reaches a certain age, often referred to as the age of majority. Depending on which state you live in and your situation, the age of majority for a custodial bank account can be 18, 21, or 25 years old.

There are two types of custodial accounts for kids: UGMAs and UTMAs. 

• UGMAs allow you to consider a wide array of investment options, including stocks and bonds.
• UTMAs allow you to open the same accounts as UGMAs and let you transfer property or items, like fine art.

You can find custodial accounts at traditional banks and credit unions. Custodial accounts can also be opened at brokerage firms.

2. Open an UGMA or UTMA account. 

You’ll need the child’s personal information to open a custodial account. The following documents and information may be necessary for opening an account online or at a branch: 

3. Add a CD to your custodial account.

Next, you’ll choose the CD you’d like to open. The rates and terms will vary depending on the financial institution. Minimum opening deposits for CDs are generally around $1,000. However, you can open some CDs online with $0 upfront.

When you select a CD, you may want to review the institution’s policies on early withdrawal penalties. If money has to be taken out before a CD reaches maturity, the bank will charge a fee. 

As the person overseeing the custodial account until the child reaches the age of majority, you’ll be able to renew the CD or move the money to a new account once the term ends. However, you won’t be able to take the money out for your personal use. 

Is a CD a good gift?

Kevin Mahoney, a CFP professional and the host of Financially Well, a finance podcast for millennials, says buying a CD as a gift might be a worthwhile option if you want to create an educational experience for your child and protect money from inflation strikes.

CD rates have increased significantly throughout 2022 because the Federal Reserve has raised the federal funds rate several times to combat inflation. 

“If you asked me one year ago, I would probably say CDs are not worth it. But because rates have increased, CDs are actually decent investment right now,” adds Alvin Carlos, CFA, CFP, financial planner, and managing director of District Capital Management.

If your goal is to primarily grow money for your child’s future, there may be other options to explore that could be a better fit for your circumstances. For example, Mahoney says a 529 plan or Roth IRA for kids are other accounts that might be more suitable. 

Mahoney advises people to see if getting a custodial account and CD makes sense within the context of the family’s overall finances and where their money is located.

“You don’t want to make the family’s finances or the parent’s finances more complicated by trying to do this,” says Mahoney. “At some point, it may just complicate life a little bit, and you may not keep track of it as well. You may lose the account information more easily.”

Do you have to pay taxes for a CD that’s a gift?

You may have to pay gift taxes, but it depends on how much money you have deposited into the CD. 

“A gift tax for particularly wealthy families may come into play here. Or, if for some reason, you’re giving a large amount of money to other family members or other people in this same time span that you’re gifting the CD. But for most people, it shouldn’t be a big concern,” explains Mahoney.

Gifts aren’t considered taxable if they are less than the annual exclusion amount. According to the IRS, the annual exclusion amount for gifts is $16,000 per person in 2022 and $17,000 per person in 2023. 

If you deposited more than the annual exclusion amount into a CD that’s a gift, you’ll have to fill out a federal gift tax return and include it with your annual tax returns. 

Reminder about CD maturity dates

If you are managing a custodial account, Carlos recommends setting a reminder for the date the CD term will end.

Generally, banks provide a grace period for CDs. This is a short time frame after the maturity date — around seven to 10 days — when you may take out money from a CD without facing a penalty. 

During the grace period, you can determine whether it’d be better to renew the term or consider another option. Carlos suggests reviewing CD rates to if you still have a competitive interest rate.

As the person overseeing the account on behalf of the minor, you can choose to select another CD term or move the money to another account within the custodial account once the CD reaches maturity. You won’t be able to withdraw the money for your own personal use, though.

If you would like to withdraw money from a CD, you must contact the institution to move the money into a new account. Otherwise, it’ll automatically renew for the same term after the grace period ends.