Hello,
I have purchased in Oct 2022 for my kiddos in a linked minor treasury account. I am thinking of rolling over these bonds to 529 plan in Jan 2024 - after completing 1 year + 3 months.
1. Can I rollover entire amount including principal and interest to 529 plan for each respective beneficiary?
2. What are the tax implications of doing this rollover considering I am in the Washington state?
3. If I rollover these funds to 529 in 2024 - would I still be able to contribute additional $18000 per child to 529 plan for current year without incurring gift tax. Essentially since IBonds were purchased for the year 2022 - would this rollover apply for the year 2022 or would it utilize limits for year 2024.
Q. Can I rollover entire amount including principal and interest to 529 plan for each respective beneficiary?
A. No. To be eligible for an interest exclusion on a rollover, the bonds must meet the rules for using bonds for education. Essentially, "if you want to buy savings bonds to later get this tax exclusion for a child's higher education, you must register the bonds with yourself, or yourself and your spouse, as owners", not the children. Reference: https://treasurydirect.gov/savings-bonds/tax-information-ee-i-bonds/using-bonds-for-higher-education/#id-which-savings-bonds-qualify--983273
Q. What are the tax implications of doing this rollover considering I am in the Washington state?
A. None. There is no federal deduction and WA does not have an income tax (most states allow a deduction and a savings bond rollover may qualify). The tax benefits come later when the 529 dollars are withdrawn for education. One future benefit is that 529 money can be used for room & board. When cashing bonds and paying the school, directly, room & board does not count for the interest exclusion.
Q. If I rollover these funds to 529 in 2024 - would I still be able to contribute additional $18000 per child to 529 plan for current year without incurring gift tax.?
A. Yes. There is a Gift Tax exception for "super funding" a 529 plan. Reference: https://www.savingforcollege.com/article/10-rules-for-superfunding-a-529-plan
"Gift Tax" is somewhat of a misnomer. Even though a gift tax return may be required, very few people ever actually pay federal gift tax. The purpose of the gift tax return is usually only to document a reduction in the allowable estate tax exemption.
See https://turbotax.intuit.com/tax-tools/tax-tips/Tax-Planning-and-Checklists/The-Gift-Tax-Made-Simple/INF12127.html
Q. Can I rollover entire amount including principal and interest to 529 plan for each respective beneficiary?
A. No. To be eligible for an interest exclusion on a rollover, the bonds must meet the rules for using bonds for education. Essentially, "if you want to buy savings bonds to later get this tax exclusion for a child's higher education, you must register the bonds with yourself, or yourself and your spouse, as owners", not the children. Reference: https://treasurydirect.gov/savings-bonds/tax-information-ee-i-bonds/using-bonds-for-higher-education/#id-which-savings-bonds-qualify--983273
Q. What are the tax implications of doing this rollover considering I am in the Washington state?
A. None. There is no federal deduction and WA does not have an income tax (most states allow a deduction and a savings bond rollover may qualify). The tax benefits come later when the 529 dollars are withdrawn for education. One future benefit is that 529 money can be used for room & board. When cashing bonds and paying the school, directly, room & board does not count for the interest exclusion.
Q. If I rollover these funds to 529 in 2024 - would I still be able to contribute additional $18000 per child to 529 plan for current year without incurring gift tax.?
A. Yes. There is a Gift Tax exception for "super funding" a 529 plan. Reference: https://www.savingforcollege.com/article/10-rules-for-superfunding-a-529-plan
"Gift Tax" is somewhat of a misnomer. Even though a gift tax return may be required, very few people ever actually pay federal gift tax. The purpose of the gift tax return is usually only to document a reduction in the allowable estate tax exemption.
See https://turbotax.intuit.com/tax-tools/tax-tips/Tax-Planning-and-Checklists/The-Gift-Tax-Made-Simple/INF12127.html