US Savings Bonds

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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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