Savings bonds must first be sold or redeemed before being rolled into a 529 plan. The money will not be taxed as long as it is deposited into a 529 plan within 60 days.
How do I redeem EE bonds for educational purposes?
Bonds between electronic devices Log in to TreasuryDirect and follow the on-screen instructions. Within two business days after the redemption date, the cash amount will be credited to your bank or savings account.
When used for college, are savings bonds tax-free?
Advantages. The interest on these bonds is tax-free if spent for eligible higher education expenses since they are backed by the full faith and credit of the United States government. In addition, interest on Series EE and I savings bonds is normally tax-free in most states.
Is it possible to pay for college with bonds?
Perhaps your grandmother or aunt would buy you a savings bond on every birthday and significant holiday. As you approach college age, you realize what a nice present this was, even if you didn’t realize it at the time. This is especially true today because savings bonds aren’t as widely available as they used to be.
A Brief Primer on Savings Bonds
When a person purchases a savings bond, they are effectively lending money to the US government. The buyer has the option of having the bond last up to 30 years. When relatives buy savings bonds for their children, they register as the owner and the youngster as a co-owner. To cash a savings bond, you do not need to be 18 years old, and you can do so at any time. However, the longer you keep a savings bond, the more interest you will earn.
Because the government is obligated to reimburse the initial investment, savings bonds are one of the safest investment options. Bonds pay a lower interest rate than most other types of investments due to their minimal risk.
The Series I bond receives a bi-annual inflation adjustment to ensure that when the receiver cashes it out, it is worth at least as much as the purchaser paid for it. Bonds in the Series EE series have a fixed rate and pay interest. The government guaranteed a return rate of double on Series EE savings bonds, but only if you keep them for at least 20 years.
Cashing in Savings Bonds to Pay for College
The Savings Bond Education Tax Exclusion is a specific exemption in the United States tax code. You can take advantage of this exclusion to avoid paying taxes on the money you get after cashing in one or more savings bonds. Students must utilize the money they received from the savings bonds to pay for higher education expenses under the special tax exclusion. They must also pay school expenses in the same tax year that they get payment for savings bonds in their name.
To claim the Savings Bond Education Tax Exclusion if you are married at the time you cash the savings bond, you must fulfill specific income limits and submit a joint tax return. To receive student financial help, your school must qualify as a secondary education institution that meets federal government regulations.
You Can Roll Savings Bonds into a 529 College Savings Plan
People don’t always want to deal with the inconvenience of completing the requirements for a tax exemption. If this is the case, you have the option of cashing the savings bonds and transferring them to a tax-free 529 College Savings Plan. If you put your cashed savings bonds into a 529 plan within 60 days, you won’t have to pay tax on them.
After 30 years, how much is a $50 EE savings bond worth?
Savings bonds are regarded as one of the most secure investments available. The underlying principle is that the value of a savings bond grows over time, but it’s easy to lose track of how much it’s worth over time.
The TreasuryDirect savings bond calculator, fortunately, makes determining the value of a purchased savings bond a breeze. You’ll need the bond series, face value, serial number, and issuance date to figure out how much your savings bond is worth.
If you bought a $50 Series EE bond in May 2000, for example, you would have paid $25. At maturity, the government committed to repay the face amount plus interest, bringing the total value to $53.08 by May 2020. A $50 bond purchased for $25 30 years ago is now worth $103.68.
When cashing in savings bonds, how do I avoid paying taxes?
Cashing your EE or I bonds before maturity and using the money to pay for education is one strategy to avoid paying taxes on the bond interest. The interest will not be taxable if you follow these guidelines:
- The bonds must be redeemed to pay for tuition and fees for you, your spouse, or a dependent, such as a kid listed on your tax return, at an undergraduate, graduate, or vocational school. The bonds can also be used to purchase a computer for yourself, a spouse, or a dependent. Room and board costs aren’t eligible, and grandparents can’t use this tax advantage to aid someone who isn’t classified as a dependent, such as a granddaughter.
- The bond profits must be used to pay for educational expenses in the year when the bonds are redeemed.
- High-earners are not eligible. For joint filers with modified adjusted gross incomes of more than $124,800 (more than $83,200 for other taxpayers), the interest exclusion begins to phase out and ceases when modified AGI reaches $154,800 ($98,200 for other filers).
The amount of interest you can omit is lowered proportionally if the profits from all EE and I bonds cashed in during the year exceed the qualified education expenditures paid that year.
What is the purpose of college savings bonds?
Qualified taxpayers can deduct all or part of the interest earned on eligible savings bonds from their annual gross income under the education savings bond program. When the bonds’ owners utilize both the principle and interest to pay for higher education at approved institutions, either for themselves, their spouses, or their dependents, the bonds become tax-free.
Is it possible to pay off student loans with EE savings bonds?
Series EE savings bonds are among the greatest savings accounts for a grandchild since they are low-risk and guaranteed to double in value in 20 years. Savings bonds can be used for education or to pay off student loans if Mom and Dad keep them safely stashed away for years.
Each year, Series EE bonds pay a tiny, consistent amount of interest. If you’ve received an EE savings bond for education or another future expense, you can use the TreasuryDirect calculator to determine how much it’s worth.
Your EE bonds may be useful in helping you pay for college. You could also explore transferring mature savings bonds to a 529 college savings plan or another vehicle that offers higher yields than the EE series. If you go that way, you won’t lose all of your tax benefits because 529 plans have their own set of benefits.
Interest rate on savings bonds vs. interest rate on student loans
Simply explained, the holder of a Series EE savings bond earns income, but the borrower of a federal or private student loan pays interest.
While Series EE bonds pay 0.10 percent interest, government loans have interest rates ranging from 2.75 percent to 5.30 percent for the 2020-2021 school year, with private loans typically charging much higher rates. That implies that even if you make money on EE bonds, it won’t compare to the amount of interest you’re paying on your student loans.
If you’re thinking about using your savings bonds to pay off student debts, keep in mind that they’ll only cover a portion of the cost. This is due to the fact that the interest rates on government and private loans are substantially higher than the amount you receive on your education EE bonds. You’ll almost certainly be assessed a penalty if you cash in savings bonds that are less than five years old.
According to conventional knowledge, paying off higher-interest loans first and then moving on to lower-interest loans is the ideal strategy. When using savings bonds to pay for college, it’s a good idea to pay off private loans first because they have the highest interest rate. Then, with any bond money left over, you can begin repaying your federal student loans.
On my taxes, how do I report cashing in a savings bond?
Declare the savings bond interest alongside your other interest on the “Interest” line of your tax return if your total interest for the year is less than $1500 and you’re not otherwise required to report interest income on Schedule B. See the Schedule B Instructions for more details (Form 1040).
What impact do savings bonds have on the fafsa?
The federal government, as well as schools and institutions, use the free application for federal student aid, or FAFSA, to calculate how much financial help a student is eligible for. When completing the FAFSA, you must enter the current value of any savings bonds you own as an investment asset, not the face amount. For FAFSA purposes, a bond registered in the child’s name counts as an asset possessed by the child. It is reported as a parental asset if it is owned by the parent, which has a reduced influence on the student’s possible aid.
What is the process for converting savings bonds to 529 plans?
Savings bonds cannot be transferred directly into a 529 plan account. The bonds must instead be redeemed and the money transferred into a 529 plan account. Within 60 days of cashing in the bonds and within the same tax year, the proceeds must be put into a 529 college savings plan.