Savings Bonds or 529 for Kid's College Fund?
Dear Dr. Don, Is there any way to get a paper copy of a Series I saving bond that you now have to purchase online? Also, when saving for college, is it a better investment to buy Series I savings bonds or use a Section 529 college savings plan? Thanks. --John Juncture
Dear John, As you point out, the U.S. Treasury no longer sells physical (paper) savings bonds, with the one exception that you can buy paper Series I savings bonds with your tax refund. In other cases, you now own the bonds in electronic form in a Treasury Direct account.
You're not going to be able to get a print-out that resembles the old physical bonds, but you can print out the specifics of any individual electronic savings bond purchase.
Both Series I savings bonds and Section 529 college savings plans offer tax-advantaged ways to save for college. Savings bond interest can be exempt from federal income tax when bonds are used to finance a child's education. But parents must own the bonds in their name and cannot exceed certain income limitations when the bonds are redeemed. If it's going to be 15-18 years until Junior goes to college, your income may rise to the point where you can't take advantage of the savings bond's education tax exclusion.
Section 529 college savings plans come in two flavors: prepaid tuition plans and college savings accounts. In some states, you get a tax deduction or tax credit when you contribute to the plan, as well as the tax breaks available when the plan is used to fund qualified higher education expenses.
The typical investment in a prepaid tuition plan keeps pace with college cost tuition. An investment in Series I savings bonds will keep pace with general cost inflation as measured by changes in the consumer price index, or CPI. Over the past three decades, college cost inflation has outstripped the CPI inflation rate.
I'd lean toward your state's prepaid tuition plan if it's in good financial shape and offers enough flexibility that Junior won't be at big disadvantage if he wound up going somewhere other than a state university. Look into the type of return you'd earn on the prepaid tuition plan if junior goes out of state. If you'd earn the same increase in tuition rates over time that would apply at a state university, that's good. Something less than that isn't as good.
Review your state's 529 plan(s) with an eye on tax breaks for contributions, its financial strength and how the prepaid tuition option is structured.
Guesstimate whether you think you'll qualify to use the education tax exclusion on the Series I savings bonds. Check out investment choices, fees and expenses on a 529 college savings plan, which is essentially an investment account for education savings. Decide which approach makes the most sense for you and your child. There's not one right answer; you're just trying to find the answer that's right for you.
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