Do I Use the Savings Bonds First or the 529

Paying for College
1

<p>Tuition payment time is coming up soon. My daughter has roughly equal amounts in savings bonds (bought as gifts by grandparents) and in her name and a 529 account in my husband's name with D as the beneficiary.</p>

<p>What should I liquidate first? </p>

<p>I'm thinking about using the savings bonds first because it seems simpler, I don't have to match exactly the qualified education expenses as with the 529 and I'm hoping that the 529 which is invested in mutual funds goes up a little before it's cashed out.</p>

2

<p>That’s the thing about 529 accounts, most of them took a big hit in October of 2008. My 529 account unfortunately had almost no gain over the principal vale because of that, the value literally halved on that day the stock market “crashed”. It sucked.</p>

<p>So last year we cashed the savings bonds that had matured to face value (e.g. $50 bond has reached at least $100) and then used the 529 after that, to give the remaining bonds time to increase in value. In the past year the 529 didn’t perform any better than it has been, so it didn’t really matter which way we did it.</p>

3

<p>If financial aid is an issue the bonds may be having a higher impact on the EFC than the 529 account. This is because the 529 account is reported as a parent asset so only has up to a 5.6% impact on EFC while the bonds are a student asset so have a 20% impact.</p>

<p>But the bonds will be income to your daughter so may incur taxes and may affect her EFC if her total income is over the protected income allowance on FAFSA.</p>

<p>Another thing to consider is the education tax credits. Tuition paid for with tax free 529 account withdrawals is not eligible for the education tax credits (you cant double dip and get 2 tax benefits for the same money). Tuition paid for with the bond proceeds may be eligible for education tax credits (assuming you are otherwise eligible income wise etc).</p>

<p>So figure out which scenario is the best for taxes and for financial aid (if that is an issue). Depending on the amounts involved it may be beneficial to take some money from one source and some from the other.</p>

4

<p>We dumped the bonds first because the bonds were in my kid’s names and would have counted towards their asset count.</p>