I am considering transferring the money I put into the I bonds in 2021–2022 to my children’s 529 accounts. I looked it up and found that I am over the joint filing threshold for the 529 transfer tax exemption. And because I am withdrawing in fewer than five years, I will lose the last three months’ interest.
I am assuming that this will remain free from state taxes and subject to federal taxation solely at the long-term capital gains rate.
Is there anything else I should consider?
I bonds don’t have any capital gains, they only earn interest. This interest is taxed at the ordinary income tax rate, but I bonds are exempt from state taxes.
Nope, last year I did exactly the same thing.
You can only do this if the bond is in your name. Additionally, the bond must have been issued to someone who was over 24 years old at the time of issuance.
I appreciate all of your advise. It appears that I will be putting these on hold until they are ready for college.
Given that I bonds are entirely tax-free when used for higher education expenses, is it really necessary to rely on other options, or are you hoping that the 529 plan will perform well enough to cover your costs as you withdraw from it?