What to Do with Those Series EE Savings Bonds

Transcription

1 What to Do with Those Series EE Savings Bonds By Ray Hawkins, CFP, ADPA, AWMA, RICP March 17, 2015 Back in the day, millions of dollars of U.S. Savings bonds were sold for graduation and wedding gifts, and just because of patriotic feelings on the Fourth of July. Those days are long gone. However, US Savings Bonds provide an opportunity to fund college costs in tax-efficient way. US Savings Bonds have a tax consequence at maturity that many people are unaware of. In this article, we detail these two planning points and discuss the possible role of US Savings Bonds in your planning. When Series EE Bonds Were a Great Deal When Series EE bonds were introduced in the early 1980s, interest rates were soaring making their purchase attractive. Those EE bonds had a fixed, lifetime base rate that was set every six months, and they carried a "floating rate" portion of the interest that changed every six months to keep up with the prevailing rate on Treasury notes. On November 1, 1982, the first "floating" series of EE bonds was sold with a total rate of percent, a yield that included a fixed base (floor) rate of 7.5 percent! Sales soared, peaking around October 1986 as people rushed to buy before the floor rate dropped to "only" 6 percent the following year! In 1990, Series EE bonds were such an integral part of our lives that a tax benefit was created for parents who bought bonds in their own names and used the proceeds to pay for college tuition. Those who qualify based on income in the year the bonds are used (today, roughly $73,000 for single filers) can redeem the bonds tax-free if the money is used for qualifying college expenses. What to do with These Bonds

2 Some of the older EE and I bonds carry high fixed base rates, plus semi-annual adjustments. They are very attractive investments, and you don't want to cash them in before maturity because they are still a good deal. BUT, when the Series EE bonds reach maturity and stop paying interest, which will be 30 years from the purchase anniversary, you must pay taxes on the accumulated income. Many people who purchased Series EE bonds long ago have bonds worth far more than their "face value" because of the many years of accumulated accrued interest. Be aware that you must pay taxes on the accrued income in the year in which the bonds mature - even if you don't cash them in! Many seniors plan to cash in the bonds on a staggered basis to avoid earning income that moves them into a higher tax bracket, and could even impact Medicare monthly premiums. However, this strategy won't work because the IRS assesses a penalty if you don't declare the savings bond income in the year of maturity. How can Grandparents Use Their Old Bonds for a Grandchild s Education? The interest earned on Series EE US savings bonds issued after December 31, 1989 and all Series I bonds may be tax free when the bonds are redeemed to pay for qualified higher education expenses or rolled over into section 529 college savings plans, prepaid tuition plans or Coverdell Education Savings Accounts. The bond owner must have a modified adjusted gross income under the income phase-outs when the bonds are redeemed to qualify for the tax-free treatment. For 2015, the exclusion begins to phase out at: $77,500 if you file single $115,750 if you re married (filing jointly) or a qualifying widow(er) It s completely phased out at: $92,200 if you file single $145,750 if you re married (filing jointly) or a qualifying widow(er) If you file as married filing separately, you are not eligible for the exclusion.

3 Bond owners sometimes transfer their savings bonds into 529 college savings plans to preserve eligibility for the tax-free treatment. For example, if the bond owner expects to be ineligible when the child enrolls in college because of a change in income or tax filing status, it may be beneficial to redeem the bonds sooner. There are no income phase-outs on tax-free distributions from 529 college savings plans. Savings bonds cannot be directly transferred into the 529 plan account. Instead, the bonds must be redeemed and the proceeds must be deposited into a 529 college savings plan within 60 days of cashing in the bonds and within the same tax year. The account owner must file IRS Form 8815 to claim an exclusion from income for the interest earned on the bonds. Before redeeming US savings bonds, bond owners should check to be sure they qualify for a tax-free redemption: Only bonds issued in 1990 or later qualify for tax-free treatment. The child must be listed as a beneficiary on the bonds, not as an owner or co-owner. The bond owner must claim an exemption for the beneficiary on his/her federal income tax return. The bond owner must have been at least age 24 when the bonds were issued. The bond owner must have modified adjusted gross income under the income phase-outs noted above. Qualified higher education expenses must be incurred during the same tax year in which the bonds are redeemed. You must be at least age 24 on the first day of the month in which you bought the bond(s). When using bonds for your child's education, the bonds must be registered in your name and/or your spouse's name. Your child can be listed as a beneficiary on the bond, but not as a co-owner. When using bonds for your own education, the bonds must be registered in your name. If you're married, you must file a joint return to qualify for the exclusion. You must meet certain income requirements.

4 Your post-secondary institution must be a college, university, or vocational school that meets the standards for federal assistance (such as guaranteed student loan programs). Qualified Educational Expenses Include: Tuition and fees (such as lab fees and other required course expenses). Expenses that benefit you, your spouse, or a dependent for whom you claim an exemption. Expenses paid for any course required as part of a degree or certificategranting program. Expenses paid for sports, games, or hobbies qualify only if part of a degree or certificate program. Note: The costs of books or room and board are not qualified expenses. The amount of qualified expenses is reduced by the amount of any scholarships, fellowships, employer-provided educational assistance and other forms of tuition reduction. You must use both the principal and interest from the bonds to pay qualified expenses to exclude the interest from your gross income. If the amount of eligible bonds you've cashed during the year exceeds the amount of qualified educational expenses paid during the year, the amount of excludable interest is reduced pro rata. For More Information on U.S. Savings Bonds, Visit: - Click on "Individual" and then on Savings Bonds. This site includes a calculator to help you determine the current worth of your old bonds and the final maturity dates. - This site contains useful advice about valuing, managing, and cashing in your savings bonds at the appropriate time, so you get the maximum interest payment. They will send you a complimentary bond print-out, color coded, to help you track your savings bonds, their values, and their maturity dates.

5 If you need help determining the right solution for you, please contact Ray Hawkins at Important Disclosures: Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by American Economic Planning Group, Inc. ( AEPG ) will be profitable. Definitions of any indices listed herein are available upon request. Please remember to contact AEPG if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. This article is not a substitute for personalized advice from AEPG and nothing contained in this presentation is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. Investment decisions should always be made based on the investors specific financial needs, objectives, goals, time horizon, and risk tolerance. Please remember to contact AEPG Wealth Strategies if there are any changes in your personal or financial circumstances or investment objectives as these changes may impact our previous recommendations. This information is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of AEPG. Descriptions of AEPG s process and strategies are based on general practice and we may make exceptions in specific cases. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.