Dear Dr. Don,
How can I cash savings bonds to pay for my daughter’s college tuition? It is my understanding that I will not have to pay taxes on the interest if they are used to pay for education.

Or am I better off saving them for retirement. They were purchased between 1985 and 2004, the majority in 1999 or earlier. The interest we have earned is almost equal to the purchase price. Any advice would be greatly welcomed.
— Jennifer Juxtapose

Dear Jennifer,
The federal education tax exclusion for savings bonds has limitations on who can take advantage of the program, what savings bonds qualify and how those savings bonds have to be registered to qualify for the program. Bonds purchased before 1990 don’t qualify for this exclusion.

If you, the bonds and the expenses all are eligible, spending the proceeds on qualified education expenses exempts you from paying federal income tax on the interest earnings. Rather than list all the requirements here, I’ll refer you to the Education Planning page on the TreasuryDirect Web site.

To find the interest you have earned on these bonds and other information, I strongly suggest you input the bonds into the Savings Bond Wizard, a free download available from the Treasury.

Given the choice between redeeming qualified bonds to take advantage of the education tax exclusion and not redeeming the qualified bonds, I think you should redeem the bonds for your daughter’s education expenses.

The only caution I have is there could be some real gems in the portfolio that you’d be better off holding onto while using other funds for her expenses. That’s why you want to input your bonds into the Savings Bond Wizard, so you can make your decision based on both yield and tax considerations.

For example, if you own some of the original Series I savings bonds that paid 3.4 percent plus the inflation rate, you wouldn’t want to cash them in just to save on the taxes. When in doubt, talk to your tax professional.

Given the issuance dates you provided, all the Series EE or Series I savings bonds in your portfolio have a final maturity of 30 years. That means the 1985 purchases are only seven years away from maturity.

If you’re not accounting for the annual interest each year on your taxes, the interest earnings on the savings bonds become taxable in the year the bond is redeemed or matures — whichever comes first.

You can switch to annual accounting, but you’d want to discuss that with your tax professional, too.