Savings bonds have been popular with grandparents for decades--and for good reason. They're still a great way to contribute toward a young person's college expenses.
What Are College Savings Bonds?
Using savings bonds to finance a future college education can be a practical and easy way to put aside money for a child or grandchild. College savings bonds, more commonly known as Federal Savings Bonds, are issued by the Treasury Department and have been given to children for years to start their college savings account.
The advantage for many relatives giving these bonds is that one cannot lose the principal and the money is difficult to access while the child is young, ensuring that the bonds will be used for their intended purpose. You can give your children either Series EE or I Bonds to help them save for college. When it's time to redeem the bonds to pay for college, you can either cash them in or roll them into a 529 plan (see below).
How to Use Savings Bonds to Pay for College
A special exemption in the tax code called the Savings Bond Education Tax Exclusion allows you to avoid taxes when cashing in certain types of savings bonds for college if the money is being used for higher education expenses.
In order to qualify, you must pay for your college expenses during the same tax year in which the bonds are redeemed.
Make sure that the bonds are purchased under your and/or your spouse's name; the beneficiary child cannot be listed as a co-owner unless you are using bonds for your own education, in which case the bonds must be purchased under your name.
You must also file a joint return if you’re married, meet certain income requirements and make sure that the school qualifies for the program by being an institution of secondary education that meets the standards for federal assistance.
Opting to Roll Savings Bonds into a 529 Plan
Due to the restrictions on cashing in savings bonds for college, many people want another option. One solution for this problem is depositing or rolling the savings bonds into a 529 plan.
A 529 account is a tax-deferred savings account that can be used to cover college expenses. While the money that is deposited into these accounts comes from after-tax wages, the investments in the account can grow tax-deferred. As long as the student uses the money for college, taxes will never have to be paid on these profits. For this reason, many parents, grandparents, and other relatives prefer to buy bonds through a 529 plan.
In order to roll savings bonds into a 529 plan, the bonds must first be sold or redeemed. As long as this money is then deposited into a 529 plan within 60 days, the money will not be taxed. Just be sure to fill out form 8815 when filing your taxes.