Posted by Pat Raskob

Using Savings Bonds to Pay for College: How to go About it

Using Savings Bonds to Pay for College: How to go About it

Many seniors use savings bonds for good reasons. However, they still provide an incredible way to help pay for the college expenses of a young person.

 

Understanding College Savings Bonds

Using savings bonds to cater for college expenses is a practical way to set funds aside for a kid or a grandkid. Also known as Federal Savings Bonds, they are issued by the Treasury Department and will be transferred to kids for years to begin their college savings account. 

When relatives give this bond, it comes with the advantage of keeping the principal value safe, which also holds the fund out of the child's reach at a young age. This ensures that the bond will be used for the designated purpose. It is possible to either give your kid I Bonds or Series EE, which helps save for college. One can either cash such out or roll them into a 529 plan when you want to redeem the bonds for payment.

 

Using Savings Bonds to Pay for College 

There is a special exemption known as the Savings Bond Education Tax Exclusions in the tax code, which shields you from tax payment when cashing some savings bond types for colleges provided the funds are used for higher education. 

To qualify, one must pay the college expenses at the same tax year that the bonds were redeemed. Such bonds should be purchased with your name or your spouse’s name as you cannot list the beneficiary kid as a co-owner except if you use the bond for your education, which allows you to buy the bonds in your name. 

Married folks need to file a joint return, meet some requirements about income and ensure that their college is eligible for the program by completing the standard for assistance from the federal government.

 

Rolling Savings Bond into a 529 Plan: Options

Because of the resistance placed on cashing savings bonds for college purposes, many people prefer an alternative. A viable option is to roll such bonds into a 529 plan. 

 A 529 plan is defined as a tax-deferred savings account that can help take care of college expenses. Even though funds deposited to this account is an after-tax dollar, such investment can grow tax-deferred. Provided that the student used the funds for college, they will not pay taxes on the profits. As a result, many parents, relatives, grandparents, etc., will instead purchase bonds using a 529 plan. 

To convert a savings bond to a 529 plan, such bonds need to be either sold or redeemed. If such funds are deposited into a 529 plan within two months, they will not be taxed. However, make sure you complete Form 8815 in filing your taxes.

 

Rules when Purchasing Bonds for College 

The age limit for bond buyers is 24 years old, although parents can buy bonds for their kids. However, such bonds need to be registered in the parent’s name. 

The bond buyer cannot be more than than the annual income limit specified.

In using savings bonds for college, it is possible to use any interest they earn on Series I and Series EE bonds tax-free for college as long as they meet some conditions:

  • The funds were directed for parents or dependent kids on educational expenses that qualify. Sample qualified education expenses are course fees, tuition, etc., towards a certificate program. However, books and rooms do not qualify

  • Such expense must be in the same tax year that the bonds were redeemed

  • The principal and interest from the bonds will be used

  • The qualified education expense should not have been covered by financial assistance, scholarships, education savings accounts, 529 accounts and other tax breaks.

  • You should not file as married and separate.


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Pat Raskob
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