Once upon a time, savings bonds were synonymous with saving for college. Many of you probably were given one at birth with the intent that it one day be used to help pay for your higher education.

Savings bonds that you use to pay college bills do offer some tax advantages that help to compensate for the rather puny interest they pay. The interest can be entirely tax-free under certain circumstances.

First, the bonds must be purchased in the parents' names. Bonds purchased in your child's name don't qualify for the tax-free feature. Second, you must be at least 24 years old at the time of purchase. Third, you must use the bond interest to pay tuition or fees. You can't use the money for room and board, books, transportation or other personal expenses.

There is a catch that prevents some parents from benefiting from Uncle Sam's limited largess. At the time you redeem the bonds, what's called your "modified adjusted gross income" can't exceed certain limits. (Modified adjusted gross income includes the interest on the bonds.) Above those levels, the allowance is phased out gradually until it disappears completely. See IRS Form 8815 for current limits. For more on savings bonds, see Understanding Bonds.

Next: Roth IRAs

MORE: Kiplinger.com | The Basics of Money | Getting Started

TOOLS:   E-Mail Article  |  Print Article  |  Reprint Article  |  Content Sales

E-MAIL ALERTS: Keep up-to-date with the latest Kiplinger has to offer

SAVE, SHARE & DISCUSS:    |   |   |   |   |   |   |   |   

ADD HEADLINES: