When it comes to gift ideas, a certificate of deposit (CD) may not be on your radar. However, it can be an excellent way to invest in a loved one’s future and teach them a few things about financial management.
However, there are some downsides to using a CD to accomplish those goals, so it’s important to carefully consider your situation and objectives to determine if it’s the right fit.
Here’s what you need to know about how to gift a and when it can make sense.
Certificate of deposit gift rules
Giving someone a CD is possible, but there are some limitations. Generally, the owner of a CD must open the account in their name, so you can’t offer a certificate of deposit gift to another adult.
However, you can open a custodial account for a child and offer a CD as a gift. The two options include a Uniform Transfers to Minors Act (UTMA) account or a Uniform Grants to Minors Act (UGMA) account.
In both cases, the funds you deposit into the CD belong to the child beneficiary. With an UGMA account, however, the gifted money can only be withdrawn by the child once they reach a certain age — typically between 18 and 21, depending on where you live.
In contrast, an UTMA allows the custodian to make withdrawals for the direct benefit of the child beneficiary. Once the child reaches a certain age — again, usually between 18 and 21 — the beneficiary takes full control of the account.
When should you consider a certificate of deposit gift?
A CD can make an excellent birthday or holiday gift. It can even be a great option for a loved one’s high school graduation.
In particular, you may consider gifting a CD to teach your child about money. in exchange for locking in your funds for a set period, which can range from one month to several years. Gifting a CD can give you the opportunity to teach your child about the importance of saving money and .
You could also discuss other and investment options to help your child learn the advantages and disadvantages of each one.
Once they reach the age where they can take ownership of the funds, they’ll have a good understanding of how to manage their money as an adult.
How to gift a certificate of deposit
If you’ve decided to give a loved one a CD, here are some steps you’ll need to take to open the account.
1. Decide how much you want to give
Consider your financial situation and your goal for the account to determine how much to deposit for your child. CDs typically don’t allow additional deposits after you open the account, but you can add more money when the CD renews.
Keep in mind that many banks have , which can range from $100 to $10,000, though some financial institutions have no minimum deposit requirement at all.
2. Decide on a term
CD terms range from one month to five years or longer in some cases, so you’ll have some flexibility with how you manage the account.
For example, you could opt for the term with the best interest rate, allowing you to switch to the term with the bank’s best rate each time the .
If your child is nearing adulthood, you could use the CD term to determine when they’ll have unfettered access to the funds. They can still withdraw money anytime once they reach the age requirement for the custodial account, but they may be subject to an early withdrawal penalty if they don’t wait for the account to mature.
3. Shop around
While it may be tempting to simply open a custodial account with your current bank for convenience, you may be able to get better terms elsewhere. Take some time to research and compare the from banks that offer custodial accounts.
Factors to consider include the type of custodial accounts they offer, available CD terms, minimum deposit requirements, and interest rates.
4. Submit an application
Once you’ve decided on a bank or credit union, you may be able to open the custodial account online or in person at a local branch.
You’ll typically need to provide your personal information as the account custodian, as well as the child’s name, Social Security number, date of birth, and address.
Once the account is open, you’ll need to provide the deposit, which may come in the form of cash, a paper check, or an electronic transfer from another bank account.
Pros and cons of gifting a certificate of deposit
As with any financial gift, there are both advantages and disadvantages to opening a custodial CD for your child. Here’s what to consider.
Pros
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Invests in the child’s future: A custodial CD is a monetary gift that benefits your child at a time when they’ll need to start providing for themselves. While you can still decide on how much you want to help your child financially at that point, the CD can help give them a headstart on life as an adult.
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Safe, guaranteed return: Standard CDs offer fixed interest rates for the duration of the account term, so there’s like with an investment account.
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Earnings are predictable: Because rates are fixed, a custodial CD can make it easier to help your child understand the power of compound interest.
Cons
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You lose access to the funds: Once you deposit money or other assets into a custodial account, you can’t withdraw it for your own benefit. What’s more, UGMA and UTMA accounts don’t allow you to change the beneficiary, giving you no flexibility to transfer the funds to another child.
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You can get higher returns elsewhere: If a guaranteed return isn’t your top priority, you could also open a custodial investment account or a college savings plan for your child, both of which allow you to invest in stocks, bonds, and other securities for a potentially greater long-term return. Just keep in mind that investments are also subject to various risks, which could result in losses.
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May require specific timing: When a CD matures, it typically gives you a week or so to withdraw or add funds before it automatically renews. If your child is nearing adulthood, you’ll need to make sure you time the CD’s maturity date based on when you want them to access the funds. If you miss the window, your child may face penalties for early withdrawal.
Frequently asked questions (FAQs)
Can a CD be transferred to another person?
There is no way to transfer a custodial CD to another person. Once you’ve designated a beneficiary, you can’t change it. If the beneficiary dies, the funds in the account will be included in their estate.
With a standard CD account, however, you can add another person as a joint owner on the account or designate them as a .
Can a grandparent open a CD for a grandchild?
Yes. In fact, most custodial accounts are opened by a child’s parents or grandparents.
Can I put a CD in my kid’s name?
Yes, you can open a CD with your child as the beneficiary by using a custodial UGMA or UTMA account.
Is a CD a good gift for a baby?
A CD can be a good gift for a baby if your top priority is a safe, guaranteed return. Depending on your goals, however, you may also consider other savings options, such as a account, brokerage account, or college savings plan.