My son is heading to college this fall and I would like to use his
savings bonds tax free, although the way I read the rules I think I
cannot do it. Here is the story: All of the bonds were bought from
1994 through 2001 by various family members. All of the bonds have my
son's name on the "TO" line of the bond. A few of the bonds have my
Social Security number, a few have my son's Social Security number,
and a few have the Social Security number of various family members.
A few of the bonds have "OR" my name or my wife's name listed on them,
a few have "POD" my name or my wife's name listed on them, and a few
have no other person listed on them. It's kind of a dog's breakfast I
know, but I'm wondering if there is any way that I can use any of them
tax free for his college expenses.
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The first step in evaluating the status of a set of savings bonds is
to figure out who is the account owner and who is the beneficiary for
each bond. The tax status and financial aid treatment depend on the
account owner, not the beneficiary.
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If a parent is redeeming the bonds to pay for a child's college
education, the parent must be the owner of the bonds to get tax-free
treatment. The child may be listed as a beneficiary on the bonds but
cannot be listed as an owner or co-owner. The parent can also use the
bonds tax-free for his or her own education, but in all cases the owner of
the bonds must have been at least age 24 as of the first day of the
month in which the bonds were purchased.
Savings bonds are listed as an asset of the bond owner on the Free
Application for Federal Student Aid (FAFSA). They are not listed as an
asset of the beneficiary.
If the child is the owner of the bonds, sometimes the bonds can be
reissued with the parent as the owner and the child as the
beneficiary. The money used to buy the bonds must have come from the
parent, not the child, and the bonds must have been purchased on or
after January 1, 1990.
There is often confusion concerning who is the owner of the bonds and who
is the beneficiary. The person listed on the "Mail to" line of the
bond is not the owner or beneficiary. That is merely the delivery
address. There may be a separate "To" line on the savings bond, which
would be the owner. But it is best to check who is the registered
owner of the bonds.
The words "OR" and "WITH" are used to designate a secondary owner of
the bonds, such as "Primary Owner WITH Secondary Owner". The word
"POD" means "Payable on Death" and is used to designate the
beneficiary, who will become the owner upon death of the current
owner. For example, one might see a designation like "Owner POD
Sometimes it can be helpful to follow the Social Security numbers,
since the owner is obligated to pay income taxes on the interest
earned on the savings bonds. But the bond owner can choose to defer
paying taxes on the interest earnings until the bonds are redeemed.
Regardless of whether savings bonds are redeemed to pay for qualified
education expenses or to roll them over into a 529 college savings
plan, the account owner must fall below the income phaseouts during
the year of redemption to qualify for tax-free treatment.
Additional information may be found in the
section of the FinAid site.