U.S. Savings Bonds Tax Free Rollover

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.