Paying Med School Loans with EE Bonds via 529

[albeartross]

Hi all. I'm a new PGY-1 resident with ~290k in med school loans. My parents recently realized they had ~7k in EE bonds in my name. It's my understanding that because of the SECURE Act, I could open a 529 account for myself, cash the bonds, put that money in the 529 within 60 days, and use it to pay toward my student loans (less than the $10k lifetime limit from 529) before I consolidate them and enroll in REPAYE. I believe this amount should be non-taxable at least federally if I fill out form 8818. Am I missing anything here? Also, assuming I don't badly need the money for living expenses, would it be a better use of the bonds to cash them, pay the taxes, and put them toward investing (more funds in wife's and my HSA or Roth IRA)? Thanks for the advice.

[jacoavlu]

how old are the bonds? EE bonds you typically want to hold 20 years

[albeartross]

Although about half were issued 16-18 years ago, the rest are >20 years old and up to 32 years old. Some of the oldest have fully matured to the point they are no longer accruing interest. When I entered the bonds into an online calculator to determine their values, it seems that a good chunk of the ones that are a couple years short of 20 years are only accruing 0.73-0.77% interest annually (though the rest of the newer bonds are accruing 3-4%). I know it's not a lot of money compared to the loans, but my thought was that paying down what I can before my loans capitalize interest from consolidation would be more beneficial than the relatively small gain (~$950) from waiting until the rest of the bonds mature--especially if I ended up using them in a way that was taxable as my taxes will be much higher in a few years. Do you think it would be wiser to redeem the oldest bonds and wait 2-4 years on the newer ones?

[jacoavlu]

without sitting down and doing math I would think redeeeming bonds 20 Yr or older would be wise and 16-18yr bonds would take some more dedicated thought but would probably be worth waiting until 20y

[spiritrider]

The Savings Bonds education tax exclusion only applies to bonds purchased after 1989 by someone > age 24, subject to income limitations.

If they are in your name, the education tax exclusion almost certainly does not apply.

[Larry Ragman]

EE bonds are safe, but don’t return much. Given that there won’t be an education tax benefit. I personally would consider cashing them out and reinvesting the proceeds. The counter would be they compound tax deferred and they are state tax free when cashed. But you would still likely come out ahead in a total market index fund.

[jacoavlu]

EE bonds are safe, but don’t return much. Given that there won’t be an education tax benefit. I personally would consider cashing them out and reinvesting the proceeds. The counter would be they compound tax deferred and they are state tax free when cashed. But you would still likely come out ahead in a total market index fund.

they may not return much, but the 2 yr “yield” on one that is 18 years old, which you hold until it’s 20 years old, might be pretty high.

[Larry Ragman]

they may not return much, but the 2 yr “yield” on one that is 18 years old, which you hold until it’s 20 years old, might be pretty high.

Acknowledged, but the absolute value will still be low. I admit I am biased by annoyance with the Treasury over the petty rules it imposes on what should be a simple class of bonds, but I just can’t recommend anyone hold them.

[albeartross]

Thanks for the info about the tax exemption; I wasn't aware about the age restriction prior to issue date. Given the advice here, I think I'll plan to cash the bonds that have reached 20 years and invest those funds. I'll probably wait 2 years for the ones that are 18 years old, though I suspect the difference in my effective tax rate once the 16 year old bonds reach 20 years would wipe out most/all of the next few years' interest.