Make the investment: Consider bond funds

Whether your loved one is just beginning his or her educational journey or they are planning to enroll in college in the next year or two, it’s never too early to begin the planning process to fund those future college costs – or to pay for those current or imminent college bills. We have outlined several approaches that seek to take maximum advantage of tax benefits to minimize those expenses. Please note that these suggestions are strictly related to tax benefits. You may have non-tax-related concerns that make these suggestions irrelevant. Please do not hesitate to contact your tax advisor to learn more.

Investing in tax-exempt bonds or bond funds is one way to achieve economic growth while avoiding tax. Interest rates and degree of risk vary on these, so care must be taken in selecting your particular investment. Some tax-exempts are sold at a deep discount from face and don’t carry interest coupons. Many are marketed as college savings bonds. A small investment in these so-called zero coupon bonds can grow into a fairly sizable fund by the time your child reaches college age. “Stripped” municipal bonds (munis) provide similar advantages.

Series EE U.S. savings bonds. Series EE U.S. savings bonds offer two tax-savings opportunities when used to finance your child’s college expenses: first, you don’t have to report the interest on the bonds for federal tax purposes until the bonds are actually cashed in; and second, interest on “qualified” Series EE (and Series I) bonds may be exempt from federal tax if the bond proceeds are used for qualified college expenses.

To qualify for the tax exemption for college use, you must purchase the bonds in your own name (not the child’s) or jointly with your spouse. The proceeds must be used for tuition, fees, etc., not room and board. If only part of the proceeds are used for qualified expenses, then only that part of the interest is exempt.

If your adjusted gross income (AGI) exceeds certain amounts, the exemption is phased out. For bonds cashed in during 2022, the exemption begins to phase out when joint AGI hits $128,650 for joint return filers ($85,800 for all other returns) and is completely phased out if your AGI is at $158,650 for joint filers ($100,800 for all other returns).

If you would like to learn more, you can contact Eric Toole, CFP, with Antares Wealth (powered by Homrich Berg).

Read about gifting strategies here.

Read about education savings accounts here.

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