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If you own Series EE savings bonds issued after 1989 or Series I Bonds, you may be able to cash them in tax free when you use the proceeds to contribute to a 529 college savings plan. (You can’t transfer savings bonds directly to a 529 plan because these plans only accept cash contributions.)

Specifically, if you meet the requirements, you can exclude the interest earned on these bonds from your federal income if you redeem the bonds to pay qualified higher education expenses. Qualified higher education expenses include payments to an eligible post-secondary educational institution for tuition and fees, as well as contributions to 529 college savings programs.

For information about the eligibility requirements, including the income limits and bond registration specifications, refer to the government website, www.savingsbonds.gov.

If you qualify for the savings bond tax break, should you cash in your bonds and use the proceeds to contribute to a 529 plan? Or should you hang on to your bonds to pay future tuition costs?

The answer depends on when your child will be attending college, what type of bonds you own and when they were issued, and what type of college expenses you’ll be paying.

The advantages of cashing in

There are two main advantages of cashing in your bonds to contribute to a 529 plan:

  • Withdrawals from 529 plans for room, board, book, and equipment expenses are tax free, as well as withdrawals for tuition and fees. In contrast, when you cash in savings bonds and use the proceeds to pay for education expenses directly, only withdrawals to pay for tuition and fees qualify for the federal tax exclusion.
  • You can use the proceeds to invest in the stock and bond mutual funds offered by 529 plans, if you want this option.

Advantages of keeping savings bonds

There are three main advantages of keeping your savings bonds to pay future tuition costs:

  • The full faith and credit of the U.S. government guarantees a Savings Bond’s principal and interest payments. So savings bonds can serve as a safe investment in your diversified college portfolio.
  • Depending on when they were issued, your Series EE bonds may be earning higher guaranteed minimum interest rates than may now be available on other fixed-income investments. And Series I bonds are designed to protect your purchasing power by earning a combination of a fixed rate and a variable semiannual inflation rate.
  • In addition to the federal tax break when you pay college tuition, interest earned on savings bonds is always exempt from state and local income taxes.

Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.


Representatives are registered, securities are sold, and investment advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor, 2000 Heritage Way, Waverly, Iowa 50677, toll-free (800) 369-2862. Nondeposit investment and insurance products are not federally insured, involve investment risk, may lose value and are not obligations of or guaranteed by the financial institution. CBSI is under contract with the financial institution, through the financial services program, to make securities available to members. CUNA Brokerage Services, Inc., is a registered broker/dealer in all fifty states of the United States of America. The Representative may also be a credit union employee that accepts deposits on behalf of the financial institution.


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