Education Savings Bonds

A savings bond is an investment that accrues interest over time and is issued by the U.S. Federal government. These bonds are unable to be transferred which is different from bonds bought and sold in the securities market. Savings bonds are very low risk because they are backed by the government, and in many cases education savings bonds can help pay for college. Interest rates can vary based on the value of Treasury securities, but they are still considered a good investment for most.

There are two different kinds of savings bonds. The first is the Series EE bond, which pay interest that periodically varies but remains at 90% of the average five year Treasury securities every six months. This means that every six months, the five year yield is calculated and the rate on the bonds is 90% of that amount. The other kind of bond is the Series I bond. The Series I bond has a fluctuating interest rate that is based on factors like inflation, however part of the interest remains fixed throughout the life of the bond.

Education savings bonds allow the interest from these bonds to be tax-free as long as the taxpayer meets the eligibility requirements. The bond or bonds must be issued after the year 1989 and the owner of the bond must pay for tuition and expenses at a higher education institution such as a college or university. The aforementioned expenses have to be incurred in the same year as the bond redemption. Also, the bond holder must be a minimum of 24 years of age on the first day of the month in which the bond was purchased. If the bonds are for your educational expenses, they must be in your name.

Married couples must file jointly and certain income criteria must be met. There are also particular expenses that qualify. They include: tuition and various expenses for courses and activities related to obtaining a degree. Books and room and board are not qualifying expenses. Also, any scholarships, employer assistance programs, grants and such is subtracted from the amount of expenses you can claim.

The bond principal and interest must be used to pay for the expenses which excludes gross income interest. All in all, education savings bonds are a good way to help pay for college through investments. And, even if you are not saving or trying to earn interest for higher education, a savings bond can be a low-risk investment to add to your portfolio. If you have questions about savings bonds or any other type of investment, speak with a financial advisor who can help direct you towards the best investments for your financial goals.

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