Bond interest to contribute to a 529 plan

Terry Says

I was going to say that it’s impossible, but Mark Kantrowitz, the 529 plan guru wrote this (and I’ve linked to the full article below:

How to Handle Grandparent-owned Savings Bonds
Typically, grandparents claim the interest exclusion for a grandchild only if the grandchild is claimed on the grandparent’s tax return.

The tax-free redemptions are limited to the taxpayer, the taxpayer’s spouse, and the taxpayer’s dependents.

You can’t change the bond owner to be the grandchild’s parents, as you’d have to pay income taxes on the savings bond’s interest. Changing the bond owner might also be subject to gift taxes.

There is a multi-step workaround when the grandchild is not a dependent of the grandparent.

The grandparent should list themself as a beneficiary on the 529 college savings plan.
The grandparent does not need to be the account owner of the 529 college savings plan.
The grandparent redeems the savings bonds and contributes the proceeds to the 529 college savings plan within 60 days.
The beneficiary of the 529 plan is changed from the grandparent to the grandchild.

This process does not violate the step transaction doctrine because none of its three tests apply. There is no binding commitment to complete each step, and the sites are not mutually interdependent. The intention of each step could have an independent purpose. For example, the grandparent could choose to use the 529 plan funds to pay for continuing education courses for themself.

Here is the link to the complete article:
https://www.savingforcollege.com/article/how-to-rollover-us-savings-bonds-into-a-529-plan

References
You can obtain additional information from the following sources:

Internal Revenue Code: 26 USC 135
Chapter 10 of IRS Publication 970
Using Savings Bonds for Education, FS Publication 0051, Bureau of the Fiscal Service, Department of the Treasury