Education savings bonds
For many years, education savings bonds — officially known as qualified U.S. savings bonds — have been a popular way for individuals to save for college.
For many years, individuals have used certain U.S. savings bonds to save for college. These bonds are issued by the U.S. Treasury Department and are backed by the full faith and credit of the United States government. While these bonds offer advantages, they also have restrictions you should be aware of. And with the introduction of 529 college savings plans, many investors are asking if they should redeem their bonds and invest the proceeds in a 529 account.
Let’s start with a quick overview of how saving for college with education savings bonds works.
-
Education savings bonds are popular because when you redeem the bonds, you can exclude from your taxable income the interest you use to pay for tuition and fees for post-secondary education. You can pay qualified higher education expenses for you, your spouse or any dependents you claim as exemptions on your tax return.
-
Not all U.S. savings bonds qualify as education savings bonds, though. All Series I and any Series EE bonds issued after 1989 are eligible. Additionally, the owner must be at least 24 years old before the bond’s issue date.
-
You must meet certain income limits to exclude the interest on Series EE and I bonds. For 2009, your exclusion begins to be phased out when your modified adjusted gross income (MAGI) is greater than $69,950 for single filers ($104,900 for joint filers). The exclusion is not allowed for single filers earning $84,950 or more ($134,900 or more for joint filers). Remember, though, that interest from savings bonds for education is always exempt from state and local taxes, regardless of income.
-
You will need to meet the same income limits to avoid federal income tax if you want to redeem your bonds and roll the proceeds over into a 529 college savings plan.
Frequently asked questions about education savings bonds
Q: Can I buy education savings bonds in my child’s or grandchild’s name and redeem the bonds tax-free for their college tuition?
A: It depends on the child’s, or grandchild’s, age. Because the bond is in your child’s or grandchild’s name, he or she is the owner and must have been at least 24 years old when you bought the bond, or the interest will not be tax-free.
A: You may open an account by contacting any broker or financial professional authorized to sell the American Funds and CollegeAmerica®.
Q: Can I use money from both my education savings bonds and a 529 college savings plan in the same year?
A: Yes, but you cannot withdraw more than the total of all qualified expenses without facing tax consequences. For example, if you have $10,000 in tuition and fees, you can withdraw $5,000 from your 529 account and redeem $5,000 in education savings bonds to pay the expenses without tax consequences. If you withdraw $5,000 from one and $7,000 from the other, you’ll owe taxes on $2,000 and may face a penalty.
Q: Can I roll over the proceeds of my education savings bonds into a CollegeAmerica account?
A: Yes, but you will need to complete a CollegeAmerica account application and provide appropriate documentation, such as a 1099-INT or a written statement from the financial institution that redeemed the qualified U.S. savings bonds, that shows the earnings portion of the transfer. Please consult your tax adviser about the tax consequences of such a transfer.
CollegeAmerica is sponsored by Virginia College Savings Plan. Depending on your state of residence, there may be an in-state plan that provides tax and other benefits not available through CollegeAmerica. Before investing in any state’s 529 plan, you should consult your tax adviser.