My 30-year I bonds are maturing in 2025 and I’m worried about US federal income tax consequences — is there any way to limit my bill?

Redeem your I bonds early to pay for higher education

If you meet eligibility requirements, you may be able to avoid paying income tax on accrued interest if you redeem I bonds to pay for eligible higher education expenses. However, the requirements are pretty strict and you have to meet the following criteria:

• You must have bought the I bond in your name after 1989.
• You must have been at least 24 years old when you bought the bond.
• You must redeem the I bond to pay for undergraduate, graduate or vocational school tuition and fees for you, your spouse or a dependent.
• You can’t use the money for room and board expenses.
• You must meet income limits as eligibility starts phasing out once your adjusted gross income exceeds $96,800 for single tax filers or $145,200 for joint filers as of 2024.

As you can see, not everyone will qualify. But say you bought an I bond in 1995 at the age of 24. Thirty years later at 54, you may very well have a dependent who is a full-time student.

As long as you don’t exceed the income limitations, you could be eligible for a tax break. But it will only apply to the cashed in amount that goes toward qualified education expenses.

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Roll the I bonds into a college savings account

You also have the option to roll the I bonds over into an eligible college savings account such as a 529 plan or a Coverdell education savings account (ESA).

You can't directly roll the bond into the account, though, so you’d need to cash in on the bond and then deposit the proceeds into an eligible account within 60 days.

If you want to avoid having any portion of the earned interest taxed, you'd need to move the entire balance into the 529 plan, for example. The 529 account also must be used for yourself, your spouse or a qualifying dependent to abide by the I bond tax exemption guidelines.

If you plan to take advantage of the tax break, consult with a professional tax advisor to ensure the process is carried out accurately. Taking this route also allows you to ask if there are any other methods that can offer more flexibility with how the funds are spent.

Of course, these solutions won’t be of use to everyone. But, if you can make them work, you'll be able to avoid the big tax hit that can come after all those years of tax-deferred interest.