U.S. Savings Bonds, like other securities issued by the U.S. government, can legally be held in a self-directed individual retirement account (IRA). While they are a virtually risk-free investment, putting Savings Bonds in your IRA may not be an easy thing to do. You may have to ask the custodian, trustee, financial institution or other fiduciary administering your IRA to invest your IRA money in Series EE bonds or Series I (inflation indexed) bonds.
The fiduciary administering your IRA isn’t required to go along with your Savings Bond investment request or offer any Savings Bond investment option. It can even counsel you against investing your IRA in Savings Bonds because of their low yield compared to other high-quality securities or because they are a tax-deferred investment by themselves. If you can find an IRA fiduciary willing to go along with your desire to invest your IRA money in Savings Bonds, says the U.S. Treasury's website, you can’t buy more than $5,000 in bonds in any one year. But if the bond purchase is part of a retirement account rollover transaction, there is no purchase limit.
If you want Savings Bonds in your IRA, they must be paper bonds that will be registered in your fiduciary institution’s name as trustee for your IRA, using the institution’s taxpayer ID number. To purchase paper Savings Bonds for your IRA, the fiduciary mails a bond order form and check to the Treasury Retail Service Center serving that region of the country. The Treasury mails the paper bonds to your fiduciary. You can't buy or hold electronic Savings Bonds in your IRA because the TreasuryDirect electronic Savings Bond system isn’t set up to handle IRA accounts or any other type of trustee accounts.
If the custodian, trustee or other fiduciary of your IRA is an individual rather than a financial institution, you must obtain a letter from the Internal Revenue Service (IRS) approving that person as an IRA fiduciary and submit a copy to Treasury along with the Savings Bond purchase application. If your non-bank IRA fiduciary tries to buy Savings Bonds for your IRA account without submitting an IRS approval letter, the Treasury will reject the purchase.
Redeeming IRA Bonds
When you reach retirement age and want to turn your IRA Savings Bond holdings into cash, you must redeem the bonds through your IRA account fiduciary. The Treasury pays the proceeds to your fiduciary institution, which, in turn, pays you. If you redeem bonds for a distribution to yourself, the fiduciary must withhold 10 percent of the proceeds for income taxes. If your bond redemption is part of a tax-free retirement account rollover to other IRA investments, there is no withholding.
An IRA distribution to you of proceeds from redeemed Savings Bonds is treated for income tax purposes exactly as any other IRA distribution. The IRA fiduciary must report the proceeds from redeeming your IRA-held Savings Bonds to you and to the IRS on form 1099-R, unless the bond redemption was part of a tax-free IRA rollover. While the fiduciary holds the bonds in your IRA, it must follow the reporting rules it has in place for any other assets held in your IRA.
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