Do series EE bonds offer any special advantages if used for college savings?
Yes. Series EE bonds (which may also be called Patriot bonds) are generally inexpensive, low-risk investments whose earnings are exempt from state and local taxes. In addition, in the college savings game, the interest earned by Series EE bonds (and Series I bonds) may be exempt from federal tax if the following requirements are met:
- The bond must be issued in the name of one or both parents (not the child's name), and the owner of the bond must be at least 24 years old
- The bond proceeds must be used to pay qualified higher education expenses (generally tuition and fees, not room and board)
- The bond must be redeemed (cashed in) by the owner in the year it's used to pay the qualified education expenses of the owner, the owner's spouse, or their child
- You must file a joint tax return if you're married
- You must fall under established income limits (these limits are adjusted annually for inflation)
If you meet these requirements, you'll pay no federal tax on the interest earned by the bond when you cash it in. This saved amount can then be applied to the college bill.
However, despite this potential tax advantage, Series EE bonds have relatively low growth potential in an arena where it's crucial to keep up with annual college cost increases.