Savings bonds -> 529

[twaddle]

I just had a "d'oh!" moment, so I thought I'd share. If you cash out savings bonds, you can move the investment to a 529 plan in the same year, and you can avoid tax on the interest. Basically, a 529 plan is considered a qualified educational expense.

I blew it last year when I cashed out some low-yielding i-bonds without knowing about the 529 transfer option, and I think I blew it again this year by letting my AGI get too high. Double d'oh!

 

[Sandy]

Good tip. Don't beat yourself up too badly. there are too many moving parts and too many factors to consider to get then all right all of the time. Probably small potatoes in the long run. Paid a bit too much tax -similar to finding that someone else got a better travel deal - oh wait that was another thread!

 

[BigBob]

Hopefully others can learn this tip as well (I wish I had heard this in the Summer of 06). I had cashed in savings bonds for my kids to pay for college with the understanding that I would pay NO tax on it. Unfortunately, I was wrong. Small potatoes, but still a pain to track all of the gains, enter them into tax software, etc. Shoulda rolled theim to the 529 and taken them outta there to pay the college tuition.

 

[Nords]

Unfortunately, I was wrong.

How was this wrong? Were they not titled properly, or was the redemption done incorrectly?

 

[BigBob]

How was this wrong? Were they not titled properly, or was the redemption done incorrectly?

These were Series (E or something rather) Savings Bonds. Some were in my name, some were in my boys' names. When redemption time came(or end of the year), I believe I got a 1099 or something to indicate the gains on these, so the gains counted as taxable income. TurboTax seemed to agree with the bank where I cashed them in that I had to pay taxes on them.

When they were purchased by my mom and dad, they were earmarked for college with the understanding(at the time) that the gains, when used for college expenses were untaxed.. I cashed them in, paid the college bill, but got taxed anyhow.

In retrospect, I should have posed the question here on these boards first.
Live and learn...

 

[twaddle]

I haven't done it myself yet, but don't you just need to file form 8815 to claim an exemption after cashing in the savings bonds?

 

[ats5g]

fyi - See Education Planning from treasurydirec.gov:

Income Limitations

The full interest exclusion is only available to married couples filing joint returns and to single filers. Modified adjusted gross income includes the interest earned under a certain limit in each case. These income limits apply in the year you use bonds for educational purposes, not the year you buy the bonds. Exclusion benefits are phased out for joint or single filers with modified adjusted gross income that exceeds the limit. Full instructions and limits are outlined on IRS Form 8815.

Tax Year 2006 Income Limits

For single taxpayers, the tax exclusion begins to be reduced with a $63,100 modified adjusted gross income and is eliminated for adjusted gross incomes of $78,100 and above. For married taxpayers filing jointly, the tax exclusion begins to be reduced with a $94,700 modified adjusted gross income and is eliminated for adjusted gross incomes of $124,700 and above. Married couples must file jointly to be eligible for the exclusion.

 

[BigBob]

I haven't done it myself yet, but don't you just need to file form 8815 to claim an exemption after cashing in the savings bonds?

Perhaps TurboTax led me through that and it was an exemption. I'll check my forms to see what forms were done. It just led me to believe that it was taxable and that kinda torqued me. That 8815 does sound familiar tho...

 

[tightasadrum]

The EE-bonds must have been issued after 1989 for some reason. Sadly, I have quite a bit in EE-bonds from 1986!! Anyone know why the deduction does not cover 1986 bonds as well? I would save a hunk of change if 1986 bonds also qualified.

 

[Darryl]

Did the same thing last year and on a smaller scale this year. Thanks for the heads up so I can save a few bucks this year.

 

[BigBob]

Perhaps TurboTax led me through that and it was an exemption. I'll check my forms to see what forms were done. It just led me to believe that it was taxable and that kinda torqued me. That 8815 does sound familiar tho...

I checked out my forms and the 8815 was not listed and the exemption not filed. The TT questions definitely led me to believe I was not eligible, but it certainly was not because of AGI. I may revisit this if I feel compelled, but not sure if it is worth refiling (not that many $$, although a big part of me wants as little as possible to go to the gummint). Time and hassle.

 

[RetireeRobert]

I just had a "d'oh!" moment, so I thought I'd share. If you cash out savings bonds, you can move the investment to a 529 plan in the same year, and you can avoid tax on the interest. Basically, a 529 plan is considered a qualified educational expense.

I blew it last year when I cashed out some low-yielding i-bonds without knowing about the 529 transfer option, and I think I blew it again this year by letting my AGI get too high. Double d'oh!

But wouldn't this ONLY apply to "qualified Education Savings Bonds" ie, those issued 1990 and later for a few years? Those savings bonds where the interest is nontaxable anyway, if they are used for "educational expenses"?

Sounds too good to be true that normally taxable savings bond interest could escape just tax by putting that dough into 529 that year. Then come out of the 529 tax free.