It’s that, “oh shoot, honey, do we still have those in our strong box” kind of investment: Yes, I’m talking about savings bonds. You likely stashed them away for your kids 15 years ago, and if you’re like many families, you may have forgot about them entirely. But if your kids are now in college, it may be time to take a trip down to the cellar to dust them off.
If you don’t know what I’m talking about, government Series EE bonds are low risk savings products that pay interest until they reach 30 years of age or you cash them, whatever comes first. The major draw is that series EE bonds are guaranteed to double in value if they are kept for 20 years. This means that the $500 bond that your great Aunt Sally purchased in 2001 for your child is now redeemable for $1,000.
The other less popular savings bond option are Series I savings bonds. These bonds are inflation-adjusted and also pay interest until they reach 30 years of age. Series I bonds are not guaranteed to double in value, as they are only adjusted for inflation as measured by the Consumer Price Index, semiannually.
In most cases, the interest earned on Series EE and I bonds grows tax-deferred, meaning that the taxation on the interest accrued on the bond is due in the tax year that it is cashed in. As a bond issued from the federal government, the interest is exempt from state and local taxes but typically subject to federal taxation when redeemed. The exception to this is that interest on Series EE and I savings bonds may be tax free if used to help pay for college.
This is the reason why now may be the perfect time to redeem these bonds. The interest savings on cashing in these bonds can be substantial. Take for example a family with $5,000 in Series EE or I savings bonds. Assuming the bonds have been held for 20 years, $2,500 in interest will be taxable in the year that they are redeemed. If this family is in the 24% marginal tax bracket, they can save $600 by using these bonds to help pay for college.
To qualify for the federal tax exclusion, fill out Form 8815, and attach it to your tax return for the year in which the savings bonds were redeemed. Not all families will qualify for the exclusion, learn more about the requirements at the Treasury Direct site.
If you’re looking for a tax-efficient way to reduce the cost of college, savings bonds may be a good solution. For questions about how savings bonds can fit into your child’s college financing plan, feel free to reach out. I’m here to help!
All the best,
Andrew Holmes, Certified College Planning Specialist™
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.
 Certain requirements must be met in order for the savings bond interest to be tax-free.