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I-Bonds, 529s and college expenses of non-dependents

Posted: Tue Sep 04, 2018 6:21 am
by Sue Donim
Hi All,
Longtime lurker, first time poster here.
My specifics:
55 y/o
Resident of WA state (no state taxes)
12% tax bracket
Approximately 2 million in assets. 1 million in a 401K at Fidelity, 170K in a Roth at Vanguard and the remainder held in CDs, savings bonds and taxable Vanguard accounts.

I'd like to share an idea with you and see if it holds up to Boglehead scrutiny. I bought $75,000 worth of I-Bonds in the 2003-2006 timeframe. I am the sole owner of the bonds and I have no children. However, I have a niece (Michigan resident) and she is starting to have kids (ages 5, 2, and 1 - my great-niece and great-nephews.) I would like to help with their college expenses down the road. I would also like to take advantage of the Education Tax Exclusion on the interest earned by those I-bonds. I have already looked at a couple different ways to crack this nut. As I understand it, if I tried to "rollover" one of my I-Bonds into my great-nephews' existing 529 plan, I would not be eligible for the exclusion because the child is not my dependent. I also understand that I cannot transfer an I-Bond to my niece without triggering a taxable event. And it wouldn't do any good to make my niece a co-owner on the bonds because she wasn't yet 24 when the bonds were issued and as the original purchaser of the bonds, I would still be on the hook for the interest anyway.

Which brings me to my last idea, the one I would like to run by you. What if I were to set up my own MI state 529, naming myself as beneficiary? The 529 plan is considered a qualified educational expense. I could then cash out the I-Bonds I want to put toward educational expenses and use that money to fund the 529 (rolling the funds into the 529 within 60 days of the same tax year). I've already checked the Treasury Direct website and it appears that I would meet all of the requirements for the exclusion (including the MAGI limitation). ... cation.htm

Now that I have the 529 funded, I could use it for my education expenses. However, if I decide that this old dog is too tired to learn new tricks, I could change the beneficiary on my 529 to someone else. According to the IRS ( ... nd-answers), "There are no tax consequences if you change the designated beneficiary to another member of the family". A member of the family is defined by the IRS as follows:
In-laws, including a mother-in-law, father-in-law, brother-in-law or sister-in-law
Children, including step-children, foster children or adopted children
Siblings, including step-siblings
Aunts and uncles
First cousins
Nieces or nephews

So I could change the beneficiary on the plan to my niece. Then, according to that same IRS guidance, "Any funds distributed from a 529 plan are not taxable if rolled over to another plan for the benefit of the same beneficiary or for the benefit of a member of the beneficiary’s family" (emphasis mine), meaning I could then roll that 529 plan into the MI state 529 plan she already has set up for her son with no tax consequences. 529 owners are limited to one tax-free rollover in a 12 month period to the same beneficiary, so in theory I could fund all 3 kids in the same year. In practice, I would do this over a few years, just to see how things played out. The college years are still a ways out for all of them. I've got plenty of time (famous last words, I know.)

As far as the amount funded, I would stay within the Federal Gift Tax Exclusion (15,000 for 2018) as outlined here: ... usion.html
Even given the increasing costs of a college education, I would think that 15,000 invested for 13-18 years (along with the monies contributed by other family members) would give the kid a good start. And if not, there would be nothing to stop me from going through this process again at some point in the future, if necessary (assuming the rules don't change and I'm still around, of course.)

I have no intention of taking any state tax deductions for the initial contributions to my 529 plan or the rollover contribution to my great-nephew's plan because I am a resident of WA, not MI, so no "recapture" issues apply. I suppose I could set up my 529 plan in WA instead of MI but I don't see the point because WA doesn't have a state tax, so no opportunity for deductions, and MI's 529 fees are lower.

So after all that, I have a question - Have I cracked this nut, or am I just nuts?

This would obviously affect my asset allocation but that's something I can address with rebalancing and a TIPS fund. I'm more concerned with ensuring that what I want to do is reasonable and that I haven't overlooked something obvious. I'm certainly no expert in these matters so I would welcome any thoughts, comments or suggestions. Consider it a given that I will confer with a tax professional before committing to a course of action. I just wanted to run this by you all first.

The only reason I even have these I-bonds is because I happened to stumble upon the Bogleheads forum 15 years ago, was intrigued by the informed and (usually) civil discussions/debates, often spiced with a good bit of humor, and I started reading and learning. It seems fitting that you would now advise me on how to pass these same bonds on to another generation. I was able to retire early because of what I learned on this site. "Thank You" doesn't begin to express my appreciation.


Re: I-Bonds, 529s and college expenses of non-dependents

Posted: Wed Sep 05, 2018 6:13 pm
by Sue Donim
Anybody out there?

Re: I-Bonds, 529s and college expenses of non-dependents

Posted: Wed Sep 05, 2018 6:54 pm
by moneyman11
I think what you are planning is legit.

I too have i-bonds that I was using as a flexible kind of college savings money that wouldn't be trapped if my kids got scholarships, or their plans changed. They did end up getting tuition scholarships, but the room and board costs were still plenty.

IBonds cannot be used for room and board education expenses, but 529 money can. And since, as you mention, 529 contributions are a qualifying "education expense" for Ibond money, I simply cash out the IBonds, contribute that money to the 529, and then immediately use that 529 money for room and board expenses.

I have also moved money from one child's 529 to a younger child's 529 account without triggering any taxes.

Good luck with your plan.

Re: I-Bonds, 529s and college expenses of non-dependents

Posted: Wed Sep 05, 2018 7:11 pm
by HueyLD
Your niece's children do not fit the definition of family members.

The Pub 970 says:

"Members of the beneficiary's family. For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary.

1. Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them.
2. Brother, sister, stepbrother, or stepsister.
3. Father or mother or ancestor of either.
4. Stepfather or stepmother.
5. Son or daughter of a brother or sister.
6. Brother or sister of father or mother.
7. Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
8. The spouse of any individual listed above.
9. First cousin."

Children of your niece do not fit any of the above criteria. Item 5 includes only your nieces and nephews, not their children.

Re: I-Bonds, 529s and college expenses of non-dependents

Posted: Wed Sep 05, 2018 7:52 pm
by Sue Donim
HueyLD, that's why I would make my niece the beneficiary of my 529 first. If I went ahead and tried to make my great-nephew the beneficiary directly, he would not fit the definition of my family. But by making my niece the beneficiary first, then he fits the definition for her family. Then the beneficiary can be changed to him and the proceeds be rolled into the existing 529 she has set up for him without tax consequences. Jumping through hoops in order to adhere to the rules, but I think it works.

Re: I-Bonds, 529s and college expenses of non-dependents

Posted: Wed Sep 05, 2018 9:13 pm
by HueyLD
Ah, I did not read they your entire post carefully. I thought you were going to change the beneficiary from yourself to your great nephew/niece.

O.k., now that we have the income tax issue out of the way, we need to discuss potential gift tax filing. When you initially change the beneficiary from yourself to your niece, you need to be mindful of the amount in the 529 because if the amount is in excess of the annual exclusion amount, a gift tax return will be needed. Same with changing the beneficiary from your niece to her children should the amount be greater than the annual exclusion amount.

The governing law is 26 U.S.C. 529(c)(5)(B):

"Other gift tax rules

For purposes of chapters 12 and 13—

(A) Treatment of distributions

Except as provided in subparagraph (B), in no event shall a distribution from a qualified tuition program be treated as a taxable gift.

(B) Treatment of designation of new beneficiaryThe taxes imposed by chapters 12 and 13 shall apply to a transfer by reason of a change in the designated beneficiary under the program (or a rollover to the account of a new beneficiary) unless the new beneficiary is—

(i) assigned to the same generation as (or a higher generation than) the old beneficiary (determined in accordance with section 2651), and

(ii) a member of the family of the old beneficiary."

Pay attention to the "same generation or a higher generation" part!!!

Don't be alarmed. Filing form 709 doesn't mean you will owe any gift tax.

Re: I-Bonds, 529s and college expenses of non-dependents

Posted: Wed Sep 05, 2018 10:03 pm
by Sue Donim
Thanks moneyman11. Glad to hear that I'm not the only one doing this.

Thanks HueyTD. I intend to stay within the annual gift tax exclusion amount (15,000 for 2018, I believe). There is always the chance that the kids won't want to or won't be able to go to college, so I don't want to overfund those accounts. And if it looks like they will be underfunded based on future college costs, there is plenty of time to jump through these hoops again.

Re: I-Bonds, 529s and college expenses of non-dependents

Posted: Thu Sep 06, 2018 7:44 am
by livesoft
The exclusion of interest has an income limit for taxpayers.
IRS wrote:
Tax Year 2017 Income Limits
For single taxpayers, the tax exclusion income limit is an adjusted gross income of $93,150 and above. For married taxpayers filing jointly, the tax exclusion income limit is an adjusted gross income of $147,250 and above. Married couples must file jointly to be eligible for the exclusion.
Read more of the general outline here: ... cation.htm

It looks like we might take this exclusion for 2018 depending on the numbers. It might save us $20 in federal income taxes.

Re: I-Bonds, 529s and college expenses of non-dependents

Posted: Fri Sep 07, 2018 8:17 am
by Sue Donim
Thanks livesoft. I'm in the 12% tax bracket, so well below the tax exclusion income limit.

Re: I-Bonds, 529s and college expenses of non-dependents

Posted: Fri Sep 07, 2018 11:14 am
by Steelersfan
My only problem with your post is:

Why you didn't post it a year ago when I was researching doing the same thing, except mine would be for my grandchildren and not nieces and nephews. I could have saved a big tax bill when I gifted/transferred my I-Bonds to my kids.

Good research though. :sharebeer

Re: I-Bonds, 529s and college expenses of non-dependents

Posted: Sun Feb 10, 2019 4:34 pm
by Broken Man 1999
Ah, this is a most interesting post.

I also have a few I-bonds that will be maturing after DW and I being knee-deep in RMDs.

It would be nice to be able to make my I-Bond's accrued interest a little less taxing.

I'll just have to figure a way to get the funds to our grandchildren. There will be plenty of expenses outside their tuition, I'm pretty sure.

Broken Man 1999

Re: I-Bonds, 529s and college expenses of non-dependents

Posted: Sun Feb 24, 2019 11:05 pm
by sawdust60
Interest income exclusion limits - - - for 2018.

Form 8815 shows the interest income exclusion phase out for MAGI

between $79,550 if single, head of household, or qualifying widow(er); $119,300 if married filing jointly
and $94,550 if single, head of household, or qualifying widow(er); or $149,300 if married filing jointly

An earlier reply noted the 2017 upper limit. MAGI includes the interest being excluded, and also includes other tax exempt interest income.