Saving For Education: 529 Plans Or Savings Bonds?

With one exception, I believe that using a 529 plan is a better option than savings bonds when putting away money for your child or grandchild’s education.

The exception: If you are not sure that the money will be needed for education expenses, savings bonds may be the better option. When funds are taken out of a 529 plan for a purpose that is not a qualified college expense, there is a 10% penalty on earnings on top of normal income taxes. This penalty does not apply to saving bonds.


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A Quick Comparison of 529 Plans Versus US Savings Bonds

Benefit 529 Plans US Savings Bonds
Federal Taxes No taxes on earnings if used for a qualified educational expense. No taxes on earnings if used for a qualified educational expense IF the earnings of the parent fall under a threshold(Bonds must be in a name of a parent)
Qualified Expenses For full time students qualified expense can include room & board, in addition to tuition Primarily tuition, bonds cannot be used for room And board
State Taxes No state or local taxes on earnings & many states allow the contribution of pre-tax dollars No State or local taxes on earnings
Investment Flexibility Many investment choices & the opportunity to change investment choices Only two investment choices (EE and I) Bonds. No ability to switch between them
Contributions Limits Many plans allow you to invest $200,000 or more Maximum purchase of $20,000 per year

In every single category listed above, 529 plans have an advantage over US Savings Bonds. This should not be surprising. 529 plans are specifically designed for saving for education while savings bonds are primarily designed as a retirement savings vehicle.

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