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When Grandparents Help Pay for College: Savings Bonds

father and son on a graduation day

 

 

As grandparents, you would do anything to help out your grandkids — from sneaking them extra scoops of ice cream to slipping them an extra $20. Many grandparents go a step beyond to help fund their grandkids’ college education. It’s the ultimate gift that keeps on giving long after graduation!

While there are many options for college funding, in this article, we’ll take a look at U.S. savings bonds. Be sure to check out some of our other articles for information on other options, such as 529 plans.

 

The name’s bond …

U.S. savings bonds carry low risk and a modest return on investment. Because they are backed by the U.S. government, they are considered safe investments. They are not marketable securities, and therefore the principal and earned interested remain unaffected by any market changes. If they’re lost, stolen or destroyed, they can be replaced with the U.S. Treasury Department, which carries a record of every bond.

 

Tax implications

With series EE and series I bonds issued after 1989, you’ll enjoy special tax advantages under the Education Bond Program. This program makes the interest tax-free on series EE and I bonds when they’re used for qualified education expenses or rolled over to a 529 plan. Note that series HH bonds are ineligible. In addition, bonds purchased before 1990 cannot be exchanged for later-issue bonds.

 

Who owns it?

You need to be at least 24 years old to purchase a bond (not a problem for most grandparents!). Grandparents and parents may purchase bonds for children and register them in their own name, not the child’s, and list children as beneficiaries. If the bonds are registered in the child’s name, they are not eligible for the Education Bond interest exclusion. The interest is then taxed at the child’s income tax rate, however, which may offer tax advantages.

As purchaser of a bond, if your situation changes suddenly and you need to access the money (say, for medical expenses), you can do so. You’ll pay the price at tax time, however, so try to make sure your own retirement needs are well taken care of before purchasing any bonds for your grandkids.

 

Consider the following scenario.

For several years, one grandfather had purchased savings bonds through his employer. He left them unredeemed, never wanting to take the tax hit (can’t blame him). So instead, he retitled his bonds jointly with his grandchildren. The client now has set aside more than $10,000 for each of them with no current tax liability.

 

Limitations

The annual purchase limit per owner of series EE and series I bonds is $30,000. If a husband and wife purchase them as co-owners, you may purchase up to $60,000 in bonds in a given year.

 

Next steps and bottom line

Head over to the TreasuryDirect website to open an account and get the ball rolling if you want to purchase savings bonds. You’ll need your own tax ID and bank information as well as your grandchild’s Social Security number.

U.S. savings bonds aren’t the investment vehicle they used to be due to the low rate of return they offer. However, as a gift for your new grandchild, they’re a low-risk way to invest moderately in future generations.

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