In the midst of fading golden eras, I Bonds remain a valuable college saving option‍

Although I bonds are ending their golden age, they still have some advantages. One example is the ability to save money for your child's future college tuition, which is often overlooked by investors. 

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There are some exceptions to this rule, however, if the savings bonds are used for higher education purposes, the federal government won't tax the interest accrued as long as certain criteria are met, including a cap on the amount of income.

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As a result, many people may be able to justify investing in inflation-adjusted securities, even as yields fall, by comparing the money they put into I bonds with the money they save for college expenses in 529 plans.

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When it comes to saving for college, picking the right way to do so is especially important given the growing cost of education - the cost of a full-time education at one of the Ivy League schools now crosses close to $90,000, while tuition at non-Ivy League public schools at out-of-state colleges is typically $28,240. 

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In the same way that most investment opportunities have pros and cons, depending on your income and goals, this one is no exception. As the Federal Reserve raises its interest rates in the coming months and possibly years, the interest rate on I bonds is expected to drop as well, even though they are currently offering a very attractive interest rate of 6.89%. In the following paragraphs, you will discover what experts have to say about college savings options. 

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I Bonds: When and How to Use Them

When you invest in I bonds or 529 plans, you will not be taxed on your returns provided they are used to cover qualified educational expenses, but you will have to pay them taxes as soon as possible. Furthermore, I bonds earn interest that is tax-free at both the state and local levels, as well as withdrawals from 529 plans that are not taxable either. 

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A major difference between the two types of investments is how the money is invested. As with 401(k) plans, 529 plans allow you to invest in stocks or bonds, money market accounts, or target-date funds, depending on your preferences and risk tolerance. As a contrast, if you look at I bonds in comparison, they are considered to be relatively risk-free savings bonds that are issued by the U.S. government.

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Long-term savers may find that safety and stability make them more attractive, according to Leyder Murillo, managing director at Wolfpack Wealth Management in Denver. If you have a limited appetite for risk, or if you are already in possession of a portfolio of more volatile investments, it might make sense to put your money into I bonds in order to save for college. 

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It is likely that your 529 plan will grow faster if it is invested in stocks since equities tend to have higher returns than bonds over the long run, so that it will be more likely to grow faster. There are many fears that stock prices will decrease in the upcoming recession as recession worries are on the horizon. That assumes that you have time to wait out volatility. 

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I bonds offer a good investment option for those whose kids are currently in college or who expect their kids to be attending college over the next few years - a period during which equity markets may be erratic, according to Jeremy Keil, senior financial adviser at Keil Financial Partners in Wisconsin. 

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In order to receive interest on an in-bond, you will have to hold the bond for at least a year, and you will lose three months of interest if you withdraw the money before the five-year mark. 

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As an adviser at Your Best Path Financial Planning in Virginia, Gordon Achtermann explained that his advice depends on the age of the children the clients have. It is the optimal time to invest in I bonds over 529 plans for those who have children between the ages of 13 and 17. In the case that you buy I bonds when a child is 13 and they reach the five-year milestone when they are about to begin college, then you will be able to withdraw money penalty-free in your senior year if they purchased them when they were 16 and were purchased when they were 16.

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Karen Ogden, partner at Envest Asset Management in Connecticut, says that I bonds could supplement savings in 529 plans and other investment accounts without going all in on one strategy. I bonds have a $10,000 annual contribution limit, which allows for supplementing savings in 529 plans. 

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Investing in 529 plans when it makes sense 

592 plans have the advantage of being open to anyone. In contrast, I bond owners must meet a specific set of criteria before they can use the proceeds of the bond to pay for higher education taxes-free. There are many rules to follow when it comes to the purchase of a bond, including having to be at least 24 years old when the bond was issued, and paying for education within the same tax year in which you are claiming the exemption. 

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For the year 2022, the cutoff for single individuals was $100,800 and for married individuals and filing jointly, $150,650. For this reason, you also have to keep your income below a certain level. The fact that parents cannot pay for college excludes a large segment of the population, says Scott Cole, founder of Cole Financial Planning in Alabama.

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There is a lot of research and discussion going on in Denver regarding 529 plans and I bonds, and the owner of Partner Financial Planning believes the latter are a better investment than I bonds, especially if you invest while your child is still a young person. 

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She explained, "The funds in a 529 account can be properly diversified so that the investor's investments match their timeline, and the investments are suitable for the environment in which they live." 

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