U.S. Savings Bonds are fully guaranteed, making them a safe way to save for college. Find out which bonds are eligible and the rules for using them for college.
A Sound Investment That Yields a Modest Return
Series EE and Series I U.S. Savings Bonds, which are available from the U.S. Treasury Department, offer a low-risk and modest-return investment for college saving. And as long as the bonds are used to pay for qualified college expenses, the interest earned is generally free of federal, state, and local taxes. If purchased early in the student's life, they provide a safe, guaranteed return once college rolls around.
Rules for Purchasing Bonds for College
Bond buyers must be at least 24 years old. Parents can purchase bonds for their children, but the bonds must be registered in the parent's name.
The bond buyers must not exceed annual income limits. For tax year 2016:
- A married coupled filing jointly can take the full tax exclusion if their income is below $116,300 and take a partial exclusion if their income is between $116,300 and $146,300.
- Single filers can take the full tax exclusion if their income is below $77,500 and take a partial exclusion if their income is between $77,500 and $92,550.
The dollar amount of bonds purchased must not exceed annual limits. In 2016, individuals may purchase up to $20,000 in online/electronic savings bonds ($10,000 in Series EE and $10,000 in Series I). In addition, individuals may purchase up to $5,000 annually in Series I paper savings bonds through their federal income tax refund.
Rules for Using Savings Bonds for College
The interest earned on series EE and Series I bonds can be used tax-free for college if the following conditions are met:
- The funds are used for qualified educational expenses for parent or dependent child. These include tuition and fees for courses that count toward a degree or certificate program. Books and room and board are not qualified expenses.
- The expense occurs in the same tax year in which the bonds are redeemed.
- Both the principal and the interest from the bonds are used.
- The qualified education expenses have not already been covered by financial aid, scholarships, 529 accounts, Education Savings Accounts (ESAs), or other tax breaks.
- Your filing status is not married filing separately.
Transferring Bond Money to Education Savings Plans
You can transfer eligible EE and Series I bonds to a 529 account or ESA with no penalty. (In essence, you cash in the savings bonds and "reinvest" them in the ESA or 529 account.) You may deduct the interest earned on the bond(s) from your gross income for the tax year you completed the transfer. You can also cash in your savings bonds and simultaneously take distributions from an ESA or 529 plan—just as long as both distributions are used solely to pay for qualified education expenses.
Any bond redemptions not used for qualified college expenses are taxable as regular income. If the bond redemption exceeds the amount used for educational expenses, the interest will be taxed on a prorated basis.
Note: Financial information provided on this site is of a general nature and may not apply to your situation. Contact a financial or tax advisor before acting on such information.