Using I-Bonds to Save for College

Aug 1, 2022
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With inflation running hot, inflation-linked U.S. government "Series I" bonds are the best deal going in the fixed-income universe. So it’s not surprising that I-Bonds have become attractive for education-related savings.

The current yield is attractive (9.62% annualized), and I-Bonds also fall under the Education Savings Bond Program. That means Uncle Sam waives federal income tax on interest if the proceeds are used for qualified higher-education expenses. (I-Bond interest is already exempt from state and taxes.)

More from the U.S. Treasury Department (PDF):

The Education Savings Bond Program permits qualified taxpayers to exclude from their gross income all or a portion of the interest earned on the redemption of eligible Series EE and Series I bonds issued after 1989. You must be at least 24 years old before the bond’s issue date.

To qualify for this exclusion, the taxpayer, the taxpayer’s spouse, or the taxpayer’s dependent at certain post-secondary educational institutions must incur tuition and other educational expenses.

In this case, qualifying educational expenses include tuition and fees but do not include textbooks, sports programs, and room/board.

Also, note the bond’s owner must be at least age 24 at the time of purchase. If a parent or grandparent buys an I-Bond and puts it in the name of a child under 24, the tax waiver won’t apply.

More strings attached

The Education Savings Bond Program has other regulations. Here is a summary via Investopedia:

• Eligible education expenses must be incurred during the same tax year as the bond’s redemption.

• Any nontaxable education payments, education aid, or tax-free scholarships must be subtracted from eligible expenses.

• If the total proceeds from the bonds equal less than the amount of eligible expenses, all of the interest accrued on the bond remains tax-free. But if the bond proceeds exceed the eligible expense amount, the amount of tax-exempt interest is subject to a prorated reduction....

• All payments made with bond proceeds must be reported to the IRS along with detailed receipts. It is also necessary to maintain itemized records of all redeemed bonds. Filers must use forms the IRS specifically designed for this purpose.

As you may have guessed, there is also an income-related restriction. If the bond owner’s modified adjusted gross income is above a certain amount, the tax exclusion starts to phase out. For tax year 2021, that phase-out threshold began at $124,800 for joint filers. The exclusion disappeared entirely at $154,800. (The income thresholds go up yearly based on the inflation rate.)

Further, married owners are required to file a joint return to qualify for the tax exemption.

To claim the interest waiver for education-related expenses, you must fill out IRS Form 8815 (PDF) when filing your taxes.

This TreasuryDirect page has more on the education-related federal tax exclusion for I-Bonds.

The I-Bond-to-529-Plan rollover

Suppose you’re holding I-Bonds for education-related expenses and realize your income likely will exceed the phase-out threshold by the time you’re ready to redeem them. Or maybe future conditions change and your I-Bonds become less attractive than other options. You have an out, as described by Forbes:

You can redeem your I Bonds tax-free while you still qualify [for the tax exclusion] and roll the entire proceeds into a 529 state college savings plan, which is considered a "qualifying educational expense." When money is withdrawn from the 529, the earnings are all tax-free, so long as they’re used for college expenses.

Important: The rollover must occur within 60 days of the time you redeem the I-Bond.

General I-Bond rules

  • The maximum one owner can invest in an I-Bond is $10,000 per year. Therefore, a husband and wife can invest an annual maximum of $20,000. (Each spouse would need to set up an account at

  • You can invest an additional $5,000 per year in I-Bonds if using a tax refund.

  • If you have a trust account, the trust could purchase up to $10,000 annually (the trust is considered a separate owner).

  • An I-Bond must be held at least one year before redemption. If you hold an I-Bond for less than five years, you’ll forfeit three months of interest.

Written by

Joseph Slife

Joseph Slife

Joseph Slife has been a news writer for the Associated Press, a college instructor, and a radio host. He and his wife Joye have three grown sons.

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