EE Bonds tax implications?

Question

Our children were given EE bonds in the early 90's. Since they were not old enough, the bonds were issued in my name. If I cash them in now to pay for their college tuition, I understand we will be stuck paying the taxes on them. (Too much income - 28% +tax rate) Would there be any disadvantage to saving them for our retirement when our tax bracket will be lower?

Answer 1

Oddly enough, the bonds didn't have to be in your name, but since they are...

You *may* be eligible to EXCLUDE the interest if you cash them in to pay for tuition.  However, if your income is too high or the education credit would be a better deal (you can't double dip and take both the exclusion and an education credit), you may want to save them for retirement and come up with money from other sources.

See IRS publication 970.

Answer 2

The first thing that comes to mind is the risk that the tax rate will not be less when you are retired.  A number of factors will impact that and most of them are out of your control.  A surprising number of retires are learning that they have not dropped there income level all that much and some are finding that it has gone up because they have been so good about saving.

Answer 3

The bonds were given for the higher education.  There is no guarantee of any benefit to you for holding the bonds for another purpose, given your income levels.

Just use the bonds for the purpose for which they were given, and take the 28% of the distribution of earnings from the bonds for taxes if you want the bonds to pay for the tax generated by the distribution.

Since you are using taxable income for the bonds, you could take a $4,000 tuition and fees deduction for tuition paid from the bonds each year.  You likely make too much income to qualify for an education credit, but there is a less restrictive income limit for the tuition and fees deduction ($130K MFJ).  Depending on the amount of money in the bonds, that $4,000 tuition and fees deduction each year may effectively wipe out the tax owed on the earnings.