savings bonds interest

Forum|Forum|4 years ago
September 27, 2021
3 replies
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When I cash in savings bonds, do I have to put the savings bonds into some form of a 529 plan or can I just cash them in and use the money to pay tuition/books and housing?

GeorgeDenseff

You can only use the savings bond to pay the educational expenses of your dependents, your spouse or yourself. Cash in the savings bond at your local financial institution, in the same way you would cash a check, by signing the bond.|

You do not need to put it into a 529 or other education savings plan.

If you meet the age and income requirements, interest on your I and EE savings bonds that were issued after 1989,s tax-free if you cash in the bonds to pay tuition and fees.

Hal_Al

Employee

Q. When I cash in savings bond, can I use the money to pay tuition/books and housing?

A. Yes and no. You may use cashed savings bonds to pay for QHEE (Qualified higher educational expenses). For cashed savings bonds, "Funds can only be used towards tuition-related expenses, including lab fees and degree-required courses. The funds may not be used to cover the costs of board, books, or recreational activities"* You may not use cashed saving bonds for room (housing) and board.

However, there is a loop hole available. Putting cashed savings bond money into a 529 plan is a QHEE, for savings bonds. Room and board are qualified expenses for a 529 plan distribution. So, cash the bonds and put the money into a 529 plan (must be done in the same calendar year). Then you can withdraw the money to pay college expenses, including room & board, books and computers, as well as tuition and fees (the withdrawal must be in the same calendar year as the expenses).

*Reference: https://www.investopedia.com/ask/answers/111414/what-education-savings-bond-program.asp

Hal_Al

Employee

My reply above was edited. Books (and other course materials, including computers) are not qualified expenses for cashed savings bonds. Books and computers are qualified expenses for a 529 plan distribution.

Opus 17

Employee

In general, when you cash in savings bonds, the entire amount is not taxable, just the interest.

If you use the interest to pay for qualified higher education costs for yourself, your spouse or your dependents, that interest is tax-free. It is not required to put the money into a 529 first.

Because the definition of qualified expenses allowable for a 529 includes more kinds of expenses than the tax credits, if you put the interest into a 529, you could get a larger tax break in the long run, depending on the kind of expenses you pay.

Hal_Al

Employee

@Opus 17 said "If you use the interest to pay for qualified higher education costs for yourself, your spouse or your dependents, that interest is tax-free"

No, it doesn't work that way. You must spend the principal as well as the interest portion of the bond on education. It's best explained by example: You cashed a savings bond for $8000 of which $2000 was interest. That year you paid $4000 in tuition. $4000/$8000 = 50% of the bond proceeds were used for qualified educational expenses, so only 50% of the interest is tax free ($2000 x 50% =$1000). That calculation will be shown on form 8815 and the $1000 excluded on Schedule B.

That would be another reason to put the money in a 529. You would be allowed to exclude the full $2000 interest, in the current year, and still have the money in your 529 plan to spend (tax free) in a future year. This assumes you only withdraw $4000 (from the 529 plan), in the current year, to pay tuition.

Opus 17

Employee

@Hal_Al wrote:

@Opus 17 said "If you use the interest to pay for qualified higher education costs for yourself, your spouse or your dependents, that interest is tax-free"

No, it doesn't work that way. You must spend the principal as well as the interest portion of the bond on education.

Well, that's unfortunate, and a bit bizarre, since you already have basis in the principal. Blame Congress I guess.