Using Series EE Bonds (Tax Free) To Fund A 529

[kenkane]

I have several Series EE Savings Bonds that were purchased starting in 1990. They were purchased with the intention of using them to fund our daughter's college education, but we ended up funding that from other sources. (The bonds have not been redeemed.) Each bond lists myself and my daughter as co-owners.

I would like to know if there is a way to redeem them under the Savings Bond Education Program, and do so with the interest being tax-free. My intention would be to use the funds to set up a 529 for our granddaughter (her daughter).

Note: my daughter is no longer a dependent on our taxes.

Any ideas would be most appreciated.

[Brian_Boswell_SFC]

Greetings kenkane:

I have good news for you: Yes, so long as you meet certain criteria:

-You pay qualified education expenses for yourself, your spouse, or a dependent for whom you claim an exemption on your return.
-Your modified adjusted gross income (MAGI) is less than $92,550 ($146,300 if married filing jointly).
-Your filing status isn't married filing separately.

Assuming you meet the MAGI and filing status requirements, the key word is "or" in that first bullet. Because you are a co-owner, you can open a 529 account in your own name, list yourself as the beneficiary, and fund the account with proceeds from the EE Bonds (this needs to be done within 60 days of cashing the bonds). You'll need to file IRS Form 8815 to claim the exclusion on bond interest. Down the road you can change the beneficiary to your granddaughter, just be sure to change it to your daughter first to avoid any generation-skipping issues that can trigger tax consequences.

Alternatively, because your daughter is co-owner, she could cash the bonds, open a 529 account in her name, and change the beneficiary once to her own daughter. You would still be able to contribute to the account, but your daughter would have full control over it, including asset allocation and disbursement. So be careful if you go that route (e.g. not every family has full faith and confidence in their offspring; I could tell you some horror stories!).

Additional details are available in IRS Publication 970.

Good luck,

Brian Boswell VP, Research & Development

This information does not constitute tax advice and is provided for informational purposes only. Please consult your tax advisor, financial advisor, local taxing authority, and/or plan provider or sponsor for more information.

[kenkane]

Brian,

Thanks for your response!

I have indeed looked at IRS Publication 970 (as well as Treasury Publication 0051), and was thinking along similar lines. However, I was actually thinking of a third scenario, which I believe gives us a bit more flexibility. That scenario involves putting half of the redeemed bonds into a 529 with me as initial beneficiary, and the other half into one with my wife as initial beneficiary. That way, if a second grand child does come along, we could change mine to grandchild #1, and my wife's to grandchild #2. (And if not, we move both to grandchild # 1.)

Does that make sense to you?

Thanks,
Ken

[Brian_Boswell_SFC]

Greetings kenkane:

You could do so, though it's not necessary. From an administrative standpoint, you can put all of the assets into a single 529 plan and, at a later date, do a partial rollover to establish a second plan should a second grandchild come along. But honestly, it's up to you!

Good luck,

Brian Boswell VP, Research & Development

This information does not constitute tax advice and is provided for informational purposes only. Please consult your tax advisor, financial advisor, local taxing authority, and/or plan provider or sponsor for more information.

[kenkane]

Thanks, Brian! Just one more question:

The Treasury issued a Q&A about the Education Savings Bond Program (FS Publication 0051) that says if I included my daughter as a co-owner on the original bonds (which I did), and I want to use the bonds (claiming tax-exempt interest) to fund a 529 with her as beneficiary, I need to contact the Treasury to change the bonds to my name only.

Is this necessary, since I will be naming myself as the initial beneficiary when I cash in the bonds? I just want to make sure I won't create any tax problems when I take the intermediate step of making her beneficiary (on the path to eventually getting to granddaughter as beneficiary).

[daveindiana]

I'm in essentially the same situation and would love an answer to kenkane's last question.

[kenkane]

Dave, I didn't get an answer to this. Did you? Ken