Savings Bonds For College Funds

Many people see savings bonds as a safe way to save for their children’s future college expenses.

While there are significant advantages to this practice, there are also reasons to think twice about building your college fund with savings bonds.

According to 360FinancialLiteracy.org…

The advantages to using savings bonds include:

  • Interest earned is generally exempt from state income tax.
  • Interest earned may be exempt from federal income tax if bond proceeds are used to pay the beneficiary’s qualified education expenses, provided certain other conditions are met.
  • Bonds are backed by the federal government, so they offer a virtually guaranteed rate of return.
  • You retain control of the bonds as long as they are owned in your name.
  • Series EE bonds are purchased at half their face value, so you can begin investing with smaller amounts.
  • Bonds earn interest for up to 30 years.
  • Bonds are treated as a parental asset for federal financial aid purposes.

While disadvantages to using this approach include:

  • Bond proceeds that are not used for the beneficiary’s qualified higher education expenses will be taxed to the owner.
  • Qualified education expenses for purposes of U.S. savings bonds generally include tuition and fees only, not room and board.
  • The maximum annual purchase allowed is $10,000 per individual for EE bonds and $10,000 for I bonds (EE bonds may be purchased in paper form at half their face value; I bonds are purchased at full face value).
  • Your income must be below a certain level at the time you redeem (cash in) the bonds for you to be eligible to exclude the interest earned from federal income tax.Yet you must add the bond proceeds into your total income for the year when determining whether you meet the income threshold or not.

When creating your college planning and savings strategy, it’s always a good idea to consult your personal accountant or CPA to get the updated criteria for maximizing your investment, and having the funds you need when time for college draws near.

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