I have I bonds, purchased April 2022, that will be earning just ~3.38% interest beginning in November 2023. I understand that once a full year has passed since purchase, these I bonds can be rolled over into a 529 plan, allowing these funds to be used tax-free for educational expenses. Unlike directly using Ibonds for qualified education expenses, rolling an Ibond into a 529 plan would enable us to use the proceeds tax-free for room and board in addition to tuition. However, I want to make sure to go about this properly. Our state offers an income tax deduction on up to $8K per year of 529 contributions. My thinking is as follows: wait for 3 months to pass after November 2023, so that we forfeit the lower interest rate. In February 2024, roll over up to 4 of the individual $2K Ibonds into the 529 plan, designating these funds as 2023 contributions to the 529 plan (The 529 plan permits retroactive calendar year contributions until April of the following year.) If I am understanding correctly, when these I bonds are cashed in in February 2024, the earnings are free from state income taxes and subject to a 3 month interest penalty. Additionally, since the I bonds will be immediately rolled over into a 529 account, the proceeds will also be free from federal income taxes. Moving forward, the 529 funds could be used to pay my student's qualified educational expenses beginning in fall 2024. Am I missing any details or tax implications here? Is it permissible to retroactively deposit I bond funds into a 529 for the previous calendar year and still claim the federal tax exemption? Would it be considered "double dipping" to roll the I bonds over into a 529 and still claim a state income tax deduction for the 529 contribution since I bonds are already free of state income tax?
