US Savings Bonds

Archive for October, 2006

One advantage of owning US Savings Bonds is that there is a US Savings Bonds Tax free rollover provision. US Savings Bonds can be rolled over tax free into Section 529 plan or Education savings accounts.

Rollover U.S. Savings Bonds Proceeds Tax Free into a Section 529 Plan or Education Savings Account

Are you holding U.S. Savings Bonds (Series EE U.S. Savings Bonds or I U.S. Savings Bonds ) that are earmarked for future education expenses of your children?

Under certain conditions there is an opportunity to redeem the U.S. Savings Bonds with no immediate income tax consequence if the entire U.S. savings bond proceeds are contributed to a Section 529 Plan or an Education Savings Account (ESA). It is a U.S. Savings Bonds tax free rollover.

While simply trading a fixed income return (from the U.S. Savings Bonds) for an equity based return (from the 529 Plan) may be an attractive strategy for many people, distributions from 529 Plans and ESA s are free of federal (and often state) income taxes regardless of the parent’s future income level, if the distributions are used for qualifying education expenses, unlike from U.S. savings bonds.

U.S. savings bond interest used for the same purpose, on the other hand, is tax free only if parental income is less then a certain amount in the year of withdrawal.

In order to be eligible for a U.S. Savings Bonds Tax Free Rollover to rollover Savings Bond proceeds into a Section 529 Plan or ESA with no federal tax consequences certain requirements must be met �� including transferor income requirements for the year of the transfer.

If you do not qualify for a tax -free exchange of U.S. savings bonds, you might want to evaluate whether a taxable exchange is suitable given the your circumstances, factoring in the costs and potential benefits of tax free education related withdrawals in the future.

A very attractive feature of US Savings Bonds is their tax free redemption for education. Any US Savings Bonds holders can rollover their US Savings Bonds into an Educational IRA or a 529 plan providing certain requirements of the tax free redemption for education are met.

Rollover of US Savings Bonds Tax free

Many US Savings Bonds owners now rollover their US Savings Bonds that have reached their maturity dates into educational IRA or 529 plan. This is because through tax free redemption for education of US Savings Bonds, the interest income earned from the US Savings Bonds remain federal and state tax exempt.

What educational expenses can a tax free redemption for education of US Savings Bonds be used?

You can redeem US Savings Bonds to pay for qualified higher education expenses such as tuition and fees. Any rollover into a 529 plan or a Coverdell educational savings accounts will also qualify. That means you can rollover any amount of US Savings Bonds Tax free but if you redeem Us Savings Bonds, you cannot redeem more than the amount of qualified higher education expenses.

Tax free redemption and scholarship or financial aid

If you qualify for scholarships, fellowships, employer provided educational assistance and other tuition reduction programs, then the amount of tax free redemption of your Us Savings Bonds may be reduced.

Question: Grandpa would like to buy Savings Bonds for my daughter’s education.?

He says he can get a tax deduction if he buys Savings Bonds. My daughter is almost a year old.

Three questions:

1) Is that true? Does he get a deduction for buying the bond?

2) Who pays the taxes when we cash in those Savings Bonds 18 years from now? Do we (her parents) pay those taxes, or would her grandfather?

3) Wouldn’t a 529 be a hundred times better? My assumption is that Grandpa would just send us a check, and we would put it in her 529. Then it would with no taxes.

Answer: I don’t think grandpa would get a tax deduction by purchasing Savings Bonds. See below for tax help though. The IRS website has a wealth of great info regarding all kinds of deductions.

Your daughter would pay the taxes on the Savings Bonds. Though, in reality, if your daughter is listed on your taxes as a dependent you would would pay the taxes. Definitely not grandpa though.
I believe if you use saving bonds directly as payment for tuition you don’t pay taxes on them. Hand over the bonds to the college and it doesn’t count as income so no taxes. But, right now, most Savings Bonds have a very low interest rate– less than inflation. College expenses increase at nearly double inflation. Bonds are a hard way to save for college.

There’s an entire generation in America– the Boomers and older– that grew up with Savings Bonds as important investment and savings tool. It may be hard to overcome that psychological aspect.

A 529 would probably be a much better college savings plan. You can give grandpa the account info (administrator name, account number, etc) and he can send money directly. Your daughter would pay taxes on the 529 proceeds IF it’s not used for education, otherwise, it’s virtually tax free.

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