cashing of savings bonds
My ex-wife and I invested $20,000 in EE savings
bonds back in 1986 from my late father's estate. We're looking to
cash them in and set up a 529 or similar account for educational
purposes. The bonds are in the children's Social Security numbers.
Please advise us on the best way to divest without paying too much
in taxes. Thank you. -- Chet
In certain circumstances, interest on Series EE savings bonds can
be excluded from income if used to pay for educational expenses,
including contributing to a Section 529 plan or a Coverdell educational
savings account. However, it only applies to EE bonds issued after
1989 and owned by you and not the children. You also have to fall
below certain adjusted gross income limits.
If you cash in the bonds today, the kids would end
up paying the tax due on the earned interest without any tax break
for educational expenses since presumably they are your dependents
or those of your ex. Doing a rough calculation on the U.S.
Treasury's savings bond site, the children would be paying tax
on approximately $40,000 in interest. Assuming you have two kids
and they are over age 13, they'd each be taxed on $20,000 in interest
and would pay about $2,500 in federal tax. States exempt savings
You don't say if the bonds were originally bought
in 1986 under the children's names or if you later transferred them
into their names. If the bonds were bought in their names, then
the kids have to be over 18 years of age. It wouldn't give you much
advantage to establish a Section 529 plan when the kids are ready
for college or in college already. Since the kids would be in need
of the funds, your investment approach would have to be extremely
conservative, and that would mean there would be little or no taxable
income that would be sheltered by the 529 plan.
Your best bet may be for the kids to cash in the bonds
annually over their four years in college. Doing this would bring
their tax down to about $425 annually based on current tax rates.