Should You Cash In Your Savings Bonds to Pay for College?

Maybe you had a grandparent or aunt who bought you a savings bond for every birthday and major holiday. Although you did not quite appreciate it at the time, you understand what a thoughtful gift this was as you are approach college age. This is especially true now that savings bonds are no longer as readily available for purchase as they once were.

A Brief Primer on Savings Bonds

When a person buys a savings bond, they are technically making a loan to the United States government. The purchaser can opt to have the bond last for up to 30 years. Relatives who buy savings bonds for children register themselves as the owner and the child as the co-owner. You do not have to be 18 to cash a savings bond, and you can do so at any time. However, you will earn more interest the longer you hold onto a savings bond.

Savings bonds are one of the safest investment tools because the government has an obligation to repay the initial investment. Because of their low risk, bonds pay a lower interest rate than most other types of investments.

The Series I bond receives a bi-annual inflation adjustment to ensure it is worth at least as much as the purchaser paid for it when the recipient cashes it out. Series EE bonds come with a fixed rate and earn interest. The government guarantees double the return rate on Series EE savings bonds, but the catch is that you must hold onto them for at least 20 years.

Cashing in Savings Bonds to Pay for College

The United States tax code includes a special exemption called the Savings Bond Education Tax Exclusion. You can use this exclusion to your advantage to avoid paying taxes on the money you receive when you cash in one or more savings bonds. Under the special tax exclusion, students must use the money they obtained from the savings bonds to pay for higher education expenses. Additionally, they must pay education expenses during the same tax year they received payment for savings bonds in their name.

If you are married at the time you cash the savings bond, you need to meet certain income requirements and file a joint tax return to claim the Savings Bond Education Tax Exclusion. The school you attend must qualify as an institution of secondary learning that meets federal government standards to receive student financial aid assistance.

You Can Roll Savings Bonds into a 529 College Savings Plan

Sometimes people do not want the hassle of meeting the requirements to qualify for a tax exclusion. If this describes your situation, you have the option to cash the savings bonds and transfer them to a tax-free 529 College Savings Plan instead. You will not need to pay tax on your cashed savings bonds if you deposit the funds into a 529 plan within 60 days.

If you or your parents have additional questions about paying for school, Accolade Financial is here to help. Please contact us today to request an initial consultation.