An individual retirement account (IRA) is something everyone should have as soon as they can. The Roth version enables your investments to grow tax-free, while the traditional IRA allows you to defer taxes.
Also, you may benefit from the tax deductions that you get for traditional IRA contributions. This can enable you to reduce your tax liability during the years your income is high. And by the time you need to pay taxes, you will likely be in a tax bracket whose rates are lower.
Therefore, if the opportunity presents itself for you to purchase financial instruments within an IRA, you should take advantage of it. However, buying U.S. savings bonds is usually not possible within an IRA.
Read More: Advantages and Disadvantages of IRAs
Investing in U.S. Savings Bonds
It makes perfect financial sense to want to buy U.S. savings bonds because they are issued by the U.S. Department of Treasury. The debt securities are backed by the full faith and credit of the U.S. Government.
Therefore, they are pretty safe – exactly what you need as you hit retirement. You cannot afford to take many risks as you grow older since you will have less time to recover financially. Also, the interest is exempt from state and local income taxes.
Series EE bonds are usually purchased at face value, and you cannot buy more than $10,000 worth of bonds in a year. Neither can you redeem the bonds in less than five years after purchase, unless you want to forfeit the interest accrued in the three most recent months.
Series I bonds are usually purchased bought at face value too, and the yearly purchase limit is $10,000. However, unlike their EE counterparts, the I bonds are inflation-indexed and offer a fixed interest rate that is adjusted for inflation. But the same redemption rules apply.
Electronic bonds can be bought at penny increments from $25 to $5,000, which makes them affordable to anyone interested in saving. You can also buy paper Series I bonds when you file your tax return.
It helps to consider how U.S savings bonds compare to other forms of securities and retirement accounts before you choose a course of action.
Read More: How Do Savings Bonds Work?
Considering IRA Purchase Limits
Before considering any type of investment for your IRA, you should be aware of the annual contribution limits. If you have a traditional or Roth IRA, you can only contribute up to $6,000 each year or $7,000 if you are 50 years and older to both accounts.
Roth IRA contributions are subject to income restrictions. Restrictions for individuals and heads of households start at $129,000 ,and investing privileges end when you earn more than $144,000. For married filing jointly, the phase-out ranges are $204,000 to $214,000.
Also, if you are an individual taxpayer, your ability to get a tax deduction for your traditional IRA will stop once you begin to earn $78,000 or more and belong to a workplace plan. But if you are not covered by a workplace plan, you can contribute deduct your contributions so long as you earn less than $204,000.
When your salary reaches $214,000 a year, you lose the ability to deduct traditional IRA contributions, while married married people filing jointly have a phase-out range of $109,000 to $129,000.
Savings Bonds in an IRA
It is not possible to purchase Series I bonds in Roth IRAs or their traditional counterparts. You will also find it equally challenging to purchase Series EE bonds.
U.S. savings bonds are usually sold as electronic bonds, which are usually purchased via TreasuryDirect. However, the platform is meant for individual investors. So, you cannot use an IRA to purchase Series I bonds on the site. Neither can you do that for EE bonds.
But you could opt for other kinds of bonds and securities such as U.S. Treasury bonds or corporate bonds. To do so, you must ensure your IRA custodian can invest your money in the bonds you desire or that your brokerage offers what you want.
In addition, if your IRA fiduciary offers the service and you're a federal employee, U.S. government retirement savings bonds can be purchased on your behalf and issued to your IRA custodian. Federal employees could use both Roth and traditional IRAs to hold the bonds.
Also, if you are determined to buy securities such as Treasury inflation-protected securities (TIPS), bills, and notes, you should consider doing so via custodians such as Fidelity Investments and Charles Schwab. Alternatively, any non-bank custodian you use must be licensed and regulated by the IRS.
You can also buy Treasuries via TreasuryDirect. And then, you can transfer them to an IRA via your broker or bank. However, you should be prepared for a lot of paperwork to make that happen.
And if you redeem your U.S. savings bonds early or at maturity, you can use the monies to purchase different securities via your IRA up to the annual contribution limit. You'll need to pay any taxes due on the bonds, and you should receive a 1099-INT form to help with this.
Read More: Advantages & Disadvantages of Government Bonds
- IRS.Gov: Individual Retirement Arrangements (IRAs)
- Investor.Gov: Savings Bonds
- IRS.Gov: Retirement Topics - IRA Contribution Limits
- IRS.Gov: IRS announces changes to retirement plans for 2022
- GovInfo.Gov: 82 FR 6244 - Regulations Governing Retirement Savings Bonds
- Kiplinger: How to Add Treasury Bonds, Bills and Notes to an IRA
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