Savings Bonds and Qualified Tuition Plans (QTPs)
Tuesday, April 12th, 2005
Categorized as: Savings Bond college education deduction
I have a financial institution insisting that Savings Bonds can be “rolled over” into a Qualified Tuition Plan with no tax consequences. They say the Adjusted Gross Income limitations for excluding bond interest when used for educational purposes do not apply, however, they can’t seem to show me anything in writing on this. Is there any authority for this position?
Tom’s response
I suspect the financial professional you’re dealing with is just mixed up. There are advantages to redeeming Savings Bonds and putting the money in a Qualified Tuition Plan, but getting out of the income limitation isn’t one of them.
The limitation you get out of is related to receiving more from cashing the bonds (including principal) than you spend on eligible education expenses. Basically, no matter how much you put in a QTP, it’s all “eligible.”
My book discusses the advantages of moving bond money into a QTP. This works particularly well for people who currently have an income low enough to escape the income limitations but won’t when their kids are in college.
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Tom Adams
I have a question(s)….My daughter is going into her last year of college and she has some savings bonds issued in her name….she works part-time and made about $5,500.00 last year…but,because we pay for most of her expenses we still use her as a tax deduction. How does she use the bonds in her name to pay for tuition ? Does she cash the bonds at a bank and then pay the school (later filing some form with the IRS…as to how the money from the bond was used ? Is there some way to directly pay the school using the bond itself ? If possible…please send me an email with the answers to my questions….. Thanks, Jim B.
James - since the bonds are registered in your daughter’s name, she’s not eligible for the tax deduction. She should just cash the bonds at a bank and use the money for her expenses. Details here.
Tom Adams