Using I bonds for education savings

By Brianne Smith, CPA/PFS/ABV, Ph.D.

Editor: Theodore J. Sarenski, CPA/PFS

Series I U.S. Savings Bonds provide liquidity and tax-advantaged flexibility outside special accounts such as individual retirement accounts or education savings accounts and may be a good vehicle for education savings. I bonds are issued directly by the U.S. Treasury through its website ( and cannot be purchased within special accounts. They can be purchased online (electronic bonds) or via tax refunds (paper bonds), with an annual purchase limit of $15,000 per Social Security number (SSN) ($10,000 electronic and $5,000 paper). These bonds can be an option for education savings when certain criteria are met.

Interest earnings and taxation

Interest earned on an I bond is based on a composite rate announced every May and November, made up of a fixed rate payable over the 30-year term and an inflation-adjusted rate that changes semiannually. The average composite rate on I bonds since September 1998 is 10.56%, with the lowest rate since then being 9.62% (which has applied to bonds purchased in certain periods including the current one, between May and October 2022). The highest composite rate since September 1998 was 13.39%, which was payable between May and October 2000. Interest is payable monthly and compounded semiannually, making this a low-risk savings vehicle for not only retirement and emergency savings but also higher education. Interest earned on I bonds can be taxed annually or deferred until redemption or maturity. Earnings can be excluded from taxes completely if they are used for qualified education expenses under specific circumstances, and the interest earnings are automatically excluded from state and local taxes.

Education exclusion and qualified expenses

Interest earned on I bonds can be excluded from federal taxes when used for qualified education expenses paid for the taxpayer, a spouse, or a dependent at a postsecondary educational institution. The exclusion is calculated as a pro rata amount of qualified education expenses divided by the redemption proceeds. For example, if the proceeds from an I bond are redeemed for $12,000 ($6,000 principal and $6,000 interest) and the qualified education expenses are $9,000, then the exclusion of interest is $4,500 ([$9,000 ÷ $12,000] × $6,000). Interest earnings cannot be excluded for qualified expenses paid by scholarships or other grants. The exclusion can be claimed using Form 8115, Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989, which is filed with Form 1040, U.S. Individual Income Tax Return. Qualified education expenses include tuition and fees paid in the year of redemption. Room, board, and books do not qualify.

Stipulations apply

To be eligible for the education exclusion, the bond must have been issued to the owner after the owner reached age 24. Income limitations also apply, with a modified adjusted gross income phaseout threshold of $128,650 and a ceiling of $158,650 (as adjusted for inflation for tax years beginning in 2022) for married taxpayers filing jointly and a threshold of $85,800 and a ceiling of $100,800 for all other returns. The exclusion is not available for married taxpayers filing separately. If the student was gifted the I bonds or the bonds were purchased in the student’s name before the student reached age 24, the exclusion is not available.

Planning considerations for education savings using I bonds

A parent considering using I bonds to fund education savings should do so by purchasing the bonds in the parent’s name, not in the child’s name. If parents inadvertently purchase bonds in a child’s name that are intended for the child’s education, a remedy is to reissue the bonds by filing Treasury Bureau of the Fiscal Service Form 4000, Request to Reissue United States Savings Bonds; however, bonds should only be reissued in the parents’ name if none of the funds used to purchase the bonds belonged to the child. Also, interest on bonds already in the child’s name may be under the federal income tax threshold if the child elects to report the interest annually on a tax return in his or her own SSN.

I bonds purchased specifically for education purposes might best be purchased in smaller increments to take advantage of the pro rata exclusion and if spending needs each education year are uncertain. For example, if qualified expenses are $6,000 in 2022, all of the earnings would be excluded if the taxpayer redeems two separate I bonds for $3,000 each, versus a single I bond for $10,000. Partial redemptions are not allowed.

To illustrate how a taxpayer might determine how much to save to achieve a total education savings goal, the table “Annual Savings by Total Education Savings Goals,” below, displays possible scenarios using a constant 9.62% interest rate. If savings start in the year of a child’s birth, payments needed to achieve goals are lower than if begun later. A goal of $100,000 could be reached by purchasing $2,074 in I bonds annually for 18 years. This goal would not be achievable with fewer than six years to save since there is a limit of $15,000 of purchases a year (which would require using an annual tax refund of $5,000, in addition to purchasing $10,000 in I bonds). It would take six years of saving $12,121 annually to accumulate $100,000, again, assuming a constant return of 9.62%.


To illustrate potential savings based on annual savings goals, the table “Total Annual I Bond Purchases,” below, displays the annual purchases as column headings, then the possible savings total for the number of years designated below them, also assuming a constant 9.62% interest rate. For example, purchasing $5,000 in I bonds annually for 11 years would result in total savings of $98,654.


Even more could be saved if both spouses purchase the maximum amount under their respective SSNs. Since grandparents who do not claim the child as a dependent are not able to claim the education exclusion, they could gift $10,000 cash to the parents, who could purchase the I bonds for their children’s education savings. The primary benefit of I bond savings for education purposes is the flexibility to use the funds for retirement or other savings goals if they are not needed for education.

More information is available at, including on the education exclusion.


Theodore J. Sarenski, CPA/PFS, CFP, is a wealth manager at Capital One/United Income in Syracuse, N.Y. Mr. Sarenski is chairman of the AICPA Advanced Personal Financial Planning Conference. He is also a past chairman of the AICPA Personal Financial Planning Executive Committee and a former member of the Tax Literacy Commission. Brianne Smith, CPA/PFS/ABV, Ph.D., is the managing member of Brianne C. Smith CPA, LLC; a visiting assistant professor of accounting at Auburn University at Montgomery in Alabama; and a member of the AICPA Personal Financial Planning Executive Committee. For more information about this column, contact

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