Saving for college
Hello Terry, I asked this question to you on WGN as I was thinking of rolling my US Savings Bonds into a 529 plan for my daughters. One of them will be starting college in about 1 1/2 years. The 529 plan that I have now is College Illinois which only covers tuition not other expenses like room and board, books, etc. Also I seem to understand that if my wife and I jointly make too much income I cannot use the US Bonds to pay for these other expenses and get the tax benefit (phase out?). Therefore I heard if I was to “roll them over” into a 529 I can pay for these other expenses and get the tax benefit with there being no income cap. It is my understanding that I have to redeem the bonds and within 60 days and deposit them into a 529 plan. I would be looking for one that would be extremely conservative like just a holding tank so they would not lose principal. I think I heard that the US Savings Bonds cannot be older than a certain date to be eligible as well. I am also as the bond holder over 59 years old. I believe that there is a certain tax form that has to be included with my taxes so I will not get taxed on the proceeds (interest) on the bonds. Please confirm or correct what I am trying to explain in my situation. I have cut and pasted part of the following article for reference:
–Why would you roll an I-bond to a 529 account?–
One of the biggest advantages of this strategy is that Qualified Tuition Plans have a much wider range of qualified education expenses, which includes room and board, books, computer equipment, and other items that you may purchase with a child in college. In contrast, you would generally only be able to exclude savings bond interest if you use the entire proceeds toward tuition and fees, and you would not be able to exclude the interest used for other expenses.
Additionally, 529 plans generally have a wider range of investment options, from stock and bond portfolios to prepaid tuition plans that track the cost of certain colleges. This may be attractive if your EE bond’s interest rate is no longer competitive or your I bond’s interest rate is suddenly much lower.
You may also consider this strategy if you expect to be phased out of the interest exclusion within the next few years but had planned to use those bonds for education expenses. In this case, you may decide to roll the I-bonds to a 529 when you know you can exclude the interest from your federal taxes, rather than paying taxes on the potentially higher accrued interest in the future.
Thanks for posting your question again on my blog. It forced me to do some research, and in the process I learned something new.
And, of course, my friend Mark Kantrowitz— guru of all things related to 529 plans and college costs — had posted a great article about this subject on SavingforCollege.com.
Here’s the link:
Please copy and paste into your browser. Scroll down to the bottom of the article to read the parts relevant to your issue.
You have the facts essentially correct, in that 529 plans have no income limits for tax-free use and can pay for expenses like room and board, which are not allowed for savings bonds disbursement (assuming you qualify based on income). And yes, there is a 60-day rollover requirement.
So your big issue is finding a 529 plan that basically offers a money market investment alternative, since you are so close to needing the cash, and don’t want to speculate.
For example, the Vanguard 529 plan (open to all) has an “interest accumulation fund” option, which is basically a low-yielding money market fund you might want to choose the vanguard plan, and out a portion of your money into that fund for the soon-upcoming payment needs.