Ibond interest can be exempt from federal tax if used to pay education costs for a dependent and MAGI income is within the limits.
The income limits are close to the ACA subsidy limits.
A student can be a dependent up to the year they turn 23.
The ibonds can be “rolled” into a 529, and the money then used for education expenses like any other 529 money.
529
529 money can be transferred between the individual plans of siblings.
Some 529 money can be put into a Roth - $35k max.
Does this all seem correct?
It appears I could cash in some Ibonds to add to a 529 plan of a dependent, federal tax-free, then transfer some of the money to a different plan for our older child who is not a dependent. A tax dodge that might not be strictly above board, perhaps?
I’d like all our kids to finish college debt-free, with a fully-funded Roth. College costs will vary quite dramatically between the kids, oldest costing the most.
If used for a child’s education, the Ibond must be titled in either/both parent’s name. The child cannot be a co-owner, although the child can be a beneficiary of the Ibond
The parent must have been at least 24 years old when the Ibond was issued
The rollover must occur within 60 days of cashing the Ibond
The principal amount of the Ibond is considered to be a 529 contribution, so it is subject to 529 contribution limits and gift tax rules
Added:
The owner of the Roth IRA that the money is being deposited into has to have been the beneficiary of the 529 plan that the money is coming from for a full 15 years.
I don’t see any restrictions on which 529 plan that the Ibond can be put into for the interest to be exempt from taxes - just that it has to be rolled into a 529 plan. So it looks to me like you don’t have to do the dance of moving between sibling accounts.
Note: Don’t conflate the Ibond interest exemption for rolling into a 529 with the Ibond interest exemption for claiming education expenses. They are two different sets of rules. Beneficiaries for 529 accounts that you are making Ibond contributions to don’t have to be dependents on your tax return. For you to claim an Ibond interest exemption for education expenses directly paid by you, the student must be a dependent on your tax return.
If the non-dependent child is still incurring education expenses, you will have the added complication of reporting the 529 education expense withdrawals as “education expenses for someone not on my tax return.”
Well, even if the money is coming from a 529, only the maximum Roth contribution that the Roth IRA owner is eligible for can be put in each year. So you can’t just dump the full $35k in during year 1, if that’s what you were thinking of as a ‘fully-funded’ Roth IRA.
And if the Roth IRA owner makes more than the Roth income limits, I don’t think that you can do a back door Roth with the 529 money - my understanding is that that the rollover has to be direct from the 529 to the Roth, without the stop in a Traditional account along the way that the back door Roth dance requires.
Many thanks, AJ485. I was hoping you would chime in.
That’s good. Makes it easier.
Do you know if we have to “rollover” the entire proceeds to get the tax break, or can we keep the principle back and just put the interest income in the 529?
Yes, my wording was poor. Ability to fund their Roth from the 529 as they get their careers started is the goal. It would take 5 years to move the $35k.
“Regular Roth contributions have modified adjusted gross income limitations. But such limits do not seem to restrict the 529-to-Roth IRA—per current readings of SECURE 2.0. However, the IRS has not issued guidance on this legislation but is anticipated to do so in the future, which may result in interpretative changes.”
My understanding is that you lose the tax break on the interest if you just roll the interest. When you eventually cash out the bond that contains the principal, you will get taxed on all the interest the bond earned, even the part that you rolled into the 529.
If your child exceeds the income limits, then waiting for the guidance would probably be the prudent move.