US Savings Bonds

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Coverdell Education Savings Account or ESA for short has an advantage when US Savings Bonds are concerned. This section of Us Savings Bonds Information website discusses Coverdell Education savings accounts and US Savings Bonds. 

What is a Coverdell Education Savings Account?

A Coverdell Education Savings Account (ESA) is an account created exclusively for the purpose of paying the qualified education expenses of a child who is designated as the beneficiary of the ESA. 

For whom may a Coverdell Education Savings Account be established?

A Coverdell education savings account ESA may be established for the benefit of any child under age 18. 

Contributions to the Coverdell education savings account ESA will not be accepted after the child reaches his/her 18th birthday. 

This age limit does not apply to special needs students. A Coverdell education savings account ESA may also be established for a family member of an Coverdell education savings account ESA beneficiary to receive a rollover or transfer of the beneficiary’s Coverdell education savings account ESA. 

The family member must be under age 30 unless the transfer is due to the beneficiary’ s death, divorce or a court-ordered separation. 

This age limit does not apply if the family member is a special needs student. 

When may Contributions to a Coverdell Education Savings Account ESA begin?

Starting in 2002, Coverdell Education Savings Account ESA Contributions for a year may be made any time from the first day of the year until the due date (without extensions) of the contributor’s federal income tax return for the year.

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.