Saving for College with U.S. Savings Bonds: Buying and Redeeming

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You may have decided that Series EE and/or Series I savings bonds sound good to you. You want to start implementing a savings program using them, but you're not quite sure how you go about buying them. Actually, they're quite easy to buy through a variety of means, and they require a lot less paperwork than Section 529 plans or Coverdell accounts. And, after you actually buy a bond, you don't need to do anything further until you redeem it. You don't have to read any statements or make any investment decisions.

You may purchase Series EE and Series I Savings Bonds in several ways:

• At your local bank.
• Through payroll deduction plans at your workplace.
• From your local Federal Reserve Bank (in Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York, Philadelphia, Richmond, San Francisco, and St. Louis).
• Directly from the Bureau of the Public Debt through the mail or over the Internet. You can use the EasySaver Plan (which makes automatic transfers from your bank) or Savings Bonds Direct (which uses a major credit card).

However you buy your bonds, you must provide your name, address, and Social Security number to complete the transaction. And that's it. If you buy a bond as a gift for someone else, you need to provide their name, address, and Social Security number.

If you buy bonds with the intention of using them to pay for qualified educational expenses, and you're sure that you won't have any difficulty falling under the income phaseouts, don't pay income tax yearly on each year's interest income. You always have the option of paying income tax on U.S. Savings Bond interest each year or waiting until you redeem the bond. If you pay as you go and then choose to use the bond redemption to pay educational expenses, you lose the tax benefit that you could have had.

You may redeem your bonds at any institution where you can buy them; you don't need to redeem them at the same place where you first purchased them. When you make that redemption, you receive a Form 1099-INT for the interest you haven't reported. If you use the total amount of the proceeds (the amount you first paid to buy the bond plus all the interest) to pay for qualified expenses, no problem. You'll exclude that interest by using Form 8815 on your income tax return. Form 8815 also walks you through the calculations if you fall into the income phaseout gray area or if you use only part of the bond proceeds to pay for qualified expenses.