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A traditional education savings plan is a mix of stocks, mutual funds, education IRA , cash and certificates of deposit. However, most financial planners will always advise you to diversify your investments and education savings bonds help in that by providing steady growth of your funds and offering substantial tax advantages.
One of the main advantages of these bonds is that they are backed and guaranteed by the US government. The risk of losing your investment diminishes substantially because of this backing. In addition, these bonds are designed in such a way that they never decrease in value. The best US savings bonds for education savings are EE and I. Both these bond types earn interest on a monthly basis and this interest compounds semiannually and it is paid when the bonds are redeemed.
Interest on savings bonds is exempt from state and local income tax. In addition, EE and I bonds have additional education related federal tax benefits. Some or all interest of EE bonds issued from January 1990 and I bonds can be excluded from federal income tax if the bonds are redeemed for educational purposes. In order to qualify for this, the bonds have to be registered in the name of a parent and not the child.
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