Listen to Kevin on Wisconsin Public Radio

On Your Money® Members | Sign Up (FREE)Login


Savings Bonds for Retirement and College

by Kevin McKinley - November 13th, 2016

Posted Under: college,retirement planning

We are finally finishing up our series on the ways families can save for their most important financial priority (retirement), yet still have some money for future college costs and maybe qualify for need-based financial aid. We’ve already talked about contributing to at-work retirement plans, IRAs, and Roth IRAs, and you should probably use those vehicles before considering any other ways to save. But there’s one more vehicle that will appear to boring, yet has a certain attractive feature for families who start saving early enough.

Savings bonds

The U.S. Treasury currently issues two types of savings bonds: Series I, and Series EE. The Series I bonds pay an interest rate that rises and falls with the government’s calculated rate of inflation, and adjusts every May and November over the thirty year life of the bond. The current interest rate on Series I bonds is 2.76%, and that will remain in effect until next May 1st. Series EE bonds have a fixed interest rate that never changes while you own the bond, and that rate is currently just 0.10% . But owners of the Series EE bonds who hold their bonds for at least twenty years are guaranteed to double the original investment amount, at that point earning an effective annual interest rate of about 3.5%. Although savings bonds have a 30-year maturity, you can cash them in twelve months after purchase and incur a penalty of just three months of interest. Once you’ve owned the bonds for at least five years, they can be cashed in with no penalty at all. The bonds can be purchased for as little as $25, with a maximum annual purchase amount of $10,000 per person. Go to for more information and to buy the bonds online.

Tax savings

Interest on savings bonds is exempt from state taxation, but subject to federal income tax. However, the bond owner can choose to either declare (and pay taxes on) the interest earned each year, or wait until the bonds are redeemed to declare the interest accumulated and pay the taxes owed. So if you buy the bonds now and need the proceeds to pay for living expenses before or after you retire, you’re free to do so (paying taxes on any accumulated interest at the time of redemption). Ideally, you would delay paying taxes on the interest while you are working, and in a higher tax bracket. And then cash in the bonds while you are retired and in a lower tax bracket. But if there is a need and opportunity to use savings bonds for your child’s college costs, you may be able use the proceeds to pay for qualified higher education expenses and pay no taxes at all when the bonds are cashed in. However, the tax break for higher education expenses is only available if your income is below certain levels in the year in which the bonds are redeemed. You can find out more about the exemption by going to, and viewing Chapter 10 in Publication 970.

Financial aid ramifications

The aforementioned education tax break is only available if the savings bonds are owned by the parents--not the child in question, or anybody else. Therefore it’s probably best for parents to buy the bonds in their own name. If they do, when they apply for financial aid for their child the bonds will likely be included as a “parental asset” in the financial aid formula. Then only about 5% of the bonds’ value will be included in the money that will have to be put up before any need-based aid is awarded. However, once the bonds are cashed in, the proceeds could be included as “parental income” in the EFC, and affect the aid awarded. Consequently families who may be affected should wait to cash in the bonds until they can do it in a year that won’t be considered on future financial aid applications (such as the student’s senior year in college).