60 day interest rollover I bond interest to QTP/529

[vitaasso]

I am about to cash a number of I bonds purchased after 1989.  I am going to cash the bonds and do a 60 rollover to my NY 529 plan.  My question is can I deposit the total interest ONLY to my 529 and hold onto the face value/purchase amount of the bonds?   Thank you very much.  

[Mike9241 · Accepted solution]

When using the 529 plan as the qualified education expense, the savings bonds cannot be directly transferred to the 529 plan account.  Instead, the bonds must be redeemed, and the proceeds deposited into the 529 plan account.  The proceeds must be deposited within 60 days of cashing the bonds and within the same tax year.  If the entire proceeds (principal and interest) are not contributed to the plan, then part of the savings bond interest would be taxable. Form 8815 is used to calculate the taxable amount.

this is the form for 2022

https://www.irs.gov/pub/irs-pdf/f8815.pdf 

the amounts on lines 9,10 and 12 may change for 2023

if your MAGI (line 9) is too high for 2023 none of the interest is excludable 

[vitaasso]

Hi Mike,  First thank you very much for your reply. 

I just want to be sure our MAGI amount has nothing to do with this rule.  I just visited an IRS office yesterday.  They were very helpful but could not really find anything related to my question on withholding the purchase price of the bonds and depositing the interest only to a 529.  They were under the impression that the total interest must be roll but the purchase price/face amount of the bonds could be withheld.  Again, this was their impression and could not refer to any written rules either way.  If possible, could you please refer me to where this might be outlined.  Again, my sincere thanks.  

[dmertz]

Their impression at the IRS office was wrong.  As Mike9241 indicated, the taxable amount is calculated on Form 8815.  If less than the full amount is rolled over, some amount will be taxable.  For example, if only half of the proceeds from the bond sale is rolled over, at least half of the interest will be taxable, more than half if your MAGI falls in the phase-out range and all of it will be taxable if your MAGI is above the phase-out range.

The calculation on Form 8815 implements the requirements of section 135 of the tax code:

https://www.law.cornell.edu/uscode/text/26/135

[vitaasso]

Dear Mertz, Mike,

Thank you very much.  I see said the blind man to the deaf dog 🙂  

[Mike9241]

@vitaasso the worse part of the IRS agents giving you bad info is that had you followed it, you would have been taxed on some of the interest and would have no recourse with the IRS or even in the tax courts.