How Do I Roll Over US Savings Bonds into a 529 College Savings Plan?
February 13, 2012
I have several thousands of dollars in Series EE savings bonds (issued from 1988 through 1992). I know that you can use the bonds relatively tax free if cashed and used for qualified educational expenses, which includes contributions to a qualified tuition program such as a 529 college savings plan. If so, what is the process for doing this? — A.J.K.
The interest earned on Series EE US savings bonds issued after December 31, 1989 and all Series I bonds may be tax free when the bonds are redeemed to pay for qualified higher education expenses or rolled over into section 529 college savings plans, prepaid tuition plans or Coverdell Education Savings Accounts.
The bond owner must have a modified adjusted gross income under the income phaseouts when the bonds are redeemed to qualify for the tax-free treatment. The income phaseouts for 2011 are $71,100 to $86,100 for single tax filers and $106,650 to $136,650 for married taxpayers filing jointly. Married taxpayers who file separate returns are not eligible.
Bond owners sometimes transfer their savings bonds into 529 college savings plans to preserve eligibility for the tax-free treatment. For example, if the bond owner expects to be ineligible when the child enrolls in college because of a change in income or tax filing status, it may be beneficial to redeem the bonds sooner. There are no income phaseouts on tax-free distributions from 529 college savings plans.
Contributions to a 529 college savings plan must be made in cash. The savings bonds cannot be directly transferred into the 529 plan account. Instead, the bonds must be redeemed and the proceeds deposited into the 529 plan account.
The proceeds must be deposited into a 529 college savings plan within 60 days of cashing in the bonds and within the same tax year. The account owner must file IRS Form 8815 to claim an exclusion from income for the interest earned on the bonds. The type of savings plan should be noted in the answer to question 1(b) on the form.
Before redeeming US savings bonds, bond owners should double check to make sure they qualify for a tax-free redemption. Only bonds issued in 1990 or a later year qualify for tax-free treatment. The child must be listed as a beneficiary on the bonds, not as an owner or co-owner. The bond owner must claim an exemption for the beneficiary on his/her federal income tax return. The bond owner must have been at least 24 years old when the bonds were issued. The bond owner must have modified adjusted gross income under the income phaseouts noted above. The tax exclusion is not available to married taxpayers who file separate returns.
Similar rules apply to rolling over US savings bonds into other types of qualified tuition programs, such as prepaid tuition plans and Coverdell Education Savings Accounts.