What Grandparents Need to Know About Using Savings Bonds for a Grandchild’s Education

It’s not easy, but grandparents can avoid a tax bill when redeeming savings bonds to pay for a grandchild’s college costs.

Question: Can I use my series EE or I bonds to pay for a grandchild’s college—and save on taxes?

Answer: You can redeem savings bonds to help cover the cost of college, and in some cases the interest the bonds earn won’t be subject to federal income tax. But as a grandparent, you’ll likely have to jump through some hoops and meet income limits to avoid the tax.

Under the Education Savings Bond Program, you can exclude bond interest from your income if you use bond proceeds to pay qualified education expenses for yourself, your spouse or a dependent. If your grandchild is not a dependent that you list on your tax return, you won’t meet the standard.

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Several other restrictions apply, too. EE bonds must be issued after 1989 (all I bonds are eligible). The bonds must be issued either in your name or in both your name and your spouse’s name as co-owners (a dependent may be listed as a beneficiary but not as an owner). Plus, you must have been at least 24 years old at the bonds’ issue date. The tax exclusion begins to phase out for those with modified adjusted gross income exceeding $81,100 ($121,600 for joint returns) for the 2019 tax year, and it disappears when MAGI reaches $96,100 or more ($151,600 for joint returns). If you’re married, you have to file a joint return to exclude bond interest from income. And education expenses have to be incurred in the same tax year that the bond is redeemed.

Grandparents who are not eligible for the tax break because they don't claim their grandchildren as dependents but who are determined to get it can use a workaround that complies with IRS rules, says Mark Kantrowitz, publisher and vice president of research of Savingforcollege.com. Qualified education expenses under the Education Savings Bond Program include tuition and fees (but not room and board or books) at a post-secondary institution, as well as contributions to a Coverdell education savings account or a 529 college-savings or prepaid-tuition plan. A grandparent could list himself or herself as the beneficiary on a 529 plan—the grandparent doesn’t have to be the plan’s owner, so you could use a 529 that the child’s parents own—then redeem the bonds and contribute the proceeds to the 529 within 60 days of the redemption. After that, you could change the beneficiary on the 529 plan to the grandchild’s name.

Not only could the grandparent take advantage of the tax exclusion, but the grandchild would be able to use the money for a broad range of education expenses. Withdrawals from a 529 are tax-free for college tuition and fees, as well as room and board, books, and computers. (Plus, in most states, up to $10,000 yearly is tax-free to pay school tuition in grades kindergarten through 12.)

Lisa Gerstner
Contributing Editor, Kiplinger's Personal Finance

Lisa has spent more than15 years with Kiplinger’s Personal Finance and heads up the magazine’s annual rankings of the best banks, best rewards credit cards, and financial-services firms with the best customer service. She reports on a variety of other topics, too, from retirement to health care to money concerns for millennials. She has shared her expertise as a guest on the Today Show, CNN, Fox, NPR, Cheddar and many other media outlets around the nation. Lisa graduated from Ball State University and received the school’s “Graduate of the Last Decade” award in 2014. A military spouse, she has moved around the U.S. and currently lives in the Philadelphia area with her husband and two sons.