Dear Dr. Don,
I have a question about Series EE savings bonds. I purchased some through my employer after my children were born. We were told these could be used for education and would be tax-free.
When I purchased the bonds, they were in my name and payable upon death in each of my children’s names. I wanted to cash them in to put into a 529 plan. The time for college has now arrived for both (of) my children.
I have been advised because my name is on them that I would have to pay the taxes. I thought if I used them for education they were tax-free. How do I use these for college expenses and avoid paying the taxes?
— Jody Junior
You did the right thing by having the savings bonds registered in your name, not your children’s. If you qualify, savings bonds purchased after 1989 can be used in the Education Savings Bond Program.
To qualify, you must have been at least 24 years old in the month when you bought the bond. You must meet the modified adjusted gross income, or MAGI, limitations in the year the bond is redeemed to pay for qualified education expenses.
The TreasuryDirect website explains this program in greater detail on its “Education Planning” Web page, and the IRS provides the updated MAGI limitations for the 2014 tax year in Publication 550 (2014) when released. The MAGI limitations are shown below:
For 2014, the amount of your interest exclusion is phased out (or gradually reduced) if your filing status is married filing jointly or qualifying widow/widower and your modified adjusted gross income (AGI) is between $113,950 and $143,950. You cannot take the exclusion if your modified AGI is $143,950 or more.
For all other filing statuses, your interest exclusion is phased out if your MAGI is between $76,000 and $91,000. You cannot take the exclusion if your MAGI is $91,000 or more. For more information, see Chapter 1 of Publication 550 (2014), “Investment Income and Expenses,” when it’s released, or now in IRS Revenue Procedure 2013-35. The numbers are updated annually.
Selling the savings bonds to fund a Section 529 college savings plan is considered a qualified educational expense. So you would have to pay the taxes due to fund the accounts with the bonds. If you qualify for the Education Savings Bond Program, you don’t need the tax benefits of the 529 account, you’ll get the benefits from the program.
For your savings bonds that qualify for the education tax exclusion, you can use the bonds to fund contributions to a 529 plan. That qualification includes qualifying under the modified MAGI phase-out limitations. Some parents will choose to fund the 529 plan while they qualify under the MAGI limitation if they expect not to qualify later when the student is in college.
The bond proceeds must be deposited into the 529 plan within 60 days of redemption and in the same tax year as the redemption. The IRS also requires you to file Form 8815, “Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989” with your tax return. The 529 plan administrator will also need the Form 1099-INT plan or the account statement issued by the redeeming institution.
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