Education Savings Bonds Program: Safe Investment for the future with limitations
As we discussed in Education Planning 101, you can never start too soon. Nor should how much you make or can contribute be a limiting factor.
The Education Savings Program.
The Education Savings Bond Program permits qualified taxpayers to exclude from their gross income all or a portion of the interest earned on the redemption of qualified U.S. savings bonds. A qualified bond is a Series EE bond issued after 1989 or a Series I bond.
The bonds become tax-exempt when their owners use both the principal and interest to pay for higher education at qualified institutions, either attended by themselves, their spouses, or their dependents.
Education Savings bonds are a good option if you are looking to invest in safe fixed-income security that also assists with education savings. Two bonds to consider are the Series EE or Series I US Savings bonds.
Why are these bonds attractive? Usually, fixed income investing is taxable as ordinary income. However, any interest earned by purchasing Series EE bonds or Series I bonds is tax-free if the bond funds are used to pay for education.
Here are the requirements and phase out tax-exempt limits for these two bonds:
1. Purchased at Face Value, $25 minimum purchase to a maximum of $10,000 per calendar year
2. Interest is earned monthly but paid when the bond is cashed.
3. A bond held for 20-years doubles in value.
4. Bonds are purchased directly through TreasuryDirect.com. https://www.treasurydirect.gov/indiv/products/prod_eebonds_glance.htm
5. Once you purchase a Series EE bond, you cannot sell or transfer it.
6. There is an early withdrawal penalty: a 3-month interest penalty if redeemed after one year but held for less than five years.
7. Interest is tax-free if used for education expense
8. Must be purchased by an adult as a sole owner or b/w you and your spouse as co-owners.
9. Filing status cannot be married filing separately to qualify for non-taxable treatment of interest.
10. Interest is state and local tax-exempt.
11. The bondholder must be at least 24 years or older before the bond is issued.
12. The amount of tax-exempt interest is based on the owner’s modified adjusted gross income (MAGI).
2019 MAGI (Modified Gross Adjusted Income) Phase-Out Limit
Single $81,100 $96,100
MFJ $121,600 $151,600
13. Qualifying education expenses include:
1. Tuition and fees for enrolling or attending a qualifying educational institution.
2. A qualifying education institution is any college or university, vocational school, or any other postsecondary institution eligible to participate in a student aid program by the U.S. Department of Education.
3. Qualifying expenses do not include room and board or hobby-related courses or sports.
Need more help in deciding if these are right for you? Or confused by the advice on when to start? Luminous can help you understand your options and choose the timing that makes the most sense for you.