Using U.S. Savings Bonds For College Savings
BOSTON (CBS) – This was the first program available to offer any kind of a tax break for parents trying to save for college but now there are better alternatives available.
Both I Bonds and EE Bonds purchased after 1990 can be used for the Education Bond Program, a program designed to allow a tax exclusion for savings bonds’ interest when used to pay for college tuition and fees. There are some strict requirements to meet though.
The bonds must be in the parent’s name, not the kid’s. If grandma wants to gives the kids savings bonds for college she needs to purchase them in mom or dad’s name. The person purchasing the bonds must be over age 24. The costs of books and room and board are not considered qualified expenses. If we look at the $23,000 price tag for a year at UMASS, over $13, 000 is for tuition costs.
You are not required to indicate that you intend to use the bonds for educational purposes when you buy them. So you can be saving for college in a 529 plan and have a stash of savings bonds as a back up. The bonds are in the parent’s name so they are not considered an asset owned by the child for financial aid.
There are income limits as to who can use the program. These limits are for the year you cash in the bonds, not the year you are purchasing them. For this year, single taxpayers have the ability to use the bonds tax-free if their income is under $72,850 and not more than $87,850.
For married couples filing jointly the income tax exclusion are $109,250 and $139,250. Caveat; your income for the year you redeem the bonds will include all of the interest the bonds have earned to date. This extra income may push some families over the income cutoff. These numbers are indexed for inflation annually.
So should you use Savings Bonds for your college savings? Not right now. If you have some older bonds you can use those but I would not recommend purchasing new bonds right now. The interest rates are lousy!
You are limited to the number of bonds you can purchase annually; $10,000 of face value for each type of bond. This is down from $30,000 that once was the limit. There is no limit to the amount you can accumulate though.
You can only purchase these bonds online through the Treasury’s website or through programs where you work. Paper bonds are longer available.
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