Using I bonds for education savings.

• Date: 01 September 2022
• Author: Sarenski, Theodore J.,Smith, Brianne
• Published date: 01 September 2022
• Author: Sarenski, Theodore J.

Series I U.S. Savings Bonds provide liquidity and tax-advantaged flexibility outside special accounts such as individual retirement accounts or education savings accounts and may be a good vehicle for education savings. I bonds are issued directly by the U.S. Treasury through its website (treasurydirect.gov) and cannot be purchased within special accounts. They can be purchased online (electronic bonds) or via tax refunds (paper bonds), with an annual purchase limit of $15,000 per Social Security number (SSN) ($10,000 electronic and $5,000 paper). These bonds can be an option for education savings when certain criteria are met.

Interest earnings and taxation

Interest earned on an I bond is based on a composite rate announced every May and November, made up of a fixed rate payable over the 30-ycar term and an inflation-adjusted rate that changes semiannually. The average composite rate on I bonds since September 1998 is 10.56%, with the lowest rate since then being 9.62% (which has applied to bonds purchased in certain periods including the current one, between May and October 2022). The highest composite rate since September 1998 was 13.39%, which was payable between May and October 2000. Interest is payable monthly and compounded semiannually, making this a low-risk savings vehicle for not only retirement and emergency savings but also higher education. Interest earned on I bonds can be taxed annually or deferred until redemption or maturity. Earnings can be excluded from taxes completely if they are used for qualified education expenses under specific circumstances, and the interest earnings are automatically excluded from state and local taxes.

Education exclusion and qualified expenses

Interest earned on I bonds can be excluded from...