Page 474 - TaxAdviser_2022

PERSONAL FINANCIAL PLANNING

Using I bonds for

education savings

Editor: Series I U.S. Savings Bonds provide
Theodore J. Sarenski, CPA/PFS liquidity and tax-advantaged flexibility
outside special accounts such as indi- The average rate
Author: vidual retirement accounts or education on I bonds since
Brianne Smith, CPA/PFS/ABV, Ph.D. savings accounts and may be a good September 1998
vehicle for education savings. I bonds
is 10.56%,
are issued directly by the U.S. Treasury
through its website (treasurydirect.gov) with the lowest
and cannot be purchased within special
composite rate
accounts. They can be purchased online
(electronic bonds) or via tax refunds at 9.62% and
(paper bonds), with an annual purchase
the highest
limit of $15,000 per Social Security
I bonds provide number (SSN) ($10,000 electronic and composite rate
$5,000 paper). These bonds can be an
a flexible, option for education savings when cer- at 13.39%
tax-advantaged tain criteria are met. (which was payable
method for saving Interest earnings and taxation between May and
for children’s Interest earned on an I bond is based October 2000).
education. on a composite rate announced every
May and November, made up of a fixed
rate payable over the 30-year term and education. Interest earned on I bonds
an inflation-adjusted rate that changes can be taxed annually or deferred until
semiannually. The average composite redemption or maturity. Earnings can be
rate on I bonds since September 1998 excluded from taxes completely if they
is 10.56%, with the lowest rate since are used for qualified education expenses
then being 9.62% (which has applied under specific circumstances, and the
to bonds purchased in certain periods interest earnings are automatically ex-
including the current one, between cluded from state and local taxes.
May and October 2022). The highest
composite rate since September 1998 Education exclusion and
was 13.39%, which was payable be- qualified expenses
tween May and October 2000. Interest Interest earned on I bonds can be ex- PHOTO BY SAMUEL KESSLER/ISTOCK
is payable monthly and compounded cluded from federal taxes when used for
semiannually, making this a low-risk qualified education expenses paid for
savings vehicle for not only retirement the taxpayer, a spouse, or a dependent at
and emergency savings but also higher a postsecondary educational institution.

34 September 2022 The Tax Adviser