| If
you don't earn too much money, Series EE Savings
Bonds offer an interesting option for college
funds as well. The government a few years ago
decided that if an individual over 24 years of
age with low to moderate income purchases EE
Savings Bonds after 1989 with the intention of
using them to pay for college, the interest
received at the time of redemption of the bonds
will be tax-free. The interest earned is
completely tax-free for a single parent with
income up to $55,750 or a married couple filing
jointly with income up to $83,650. Once you hit
those income levels, the benefits are slowly
phased out. A single parent with income above
$70,750 or a married couple with income above
$113,650 is not eligible for any tax break. All
of these numbers are based on 2001 tax rates and
are subject to an annual adjustment for
inflation. EE Savings Bonds are issued by the
federal government, and are as safe as any
investment can be. They can also be purchased in
small denominations without paying any sales
commission.
However, EE Savings Bonds have several
drawbacks. One is their low rate of return. You
might do better with a taxable investment that
pays a higher rate, even after taxes. It is also
hard to predict in advance what your income
level will be when you cash in the bonds. If
your income has risen past the cutoff level for
the tax break, your effective rate of return on
the bonds just plunged into the low single
digits. To make it worse, the IRS adds the
interest from the bonds to your income before
they determine whether you qualify for the tax
break. Finally, whether the interest from these
bonds is taxed or untaxed, it will still be
considered income by the colleges and will be
assessed just like your other income.
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