In general, when you cash in savings bonds, the entire amount is not taxable, just the interest.
If you use the interest to pay for qualified higher education costs for yourself, your spouse or your dependents, that interest is tax-free. It is not required to put the money into a 529 first.
Because the definition of qualified expenses allowable for a 529 includes more kinds of expenses than the tax credits, if you put the interest into a 529, you could get a larger tax break in the long run, depending on the kind of expenses you pay.
