You might be surprised to learn than you can own U.S. savings bonds in an individual retirement account. The U.S. Treasury sells these bonds, which mature in 20 years but continue to pay interest for the 10 years following maturity. The only way to get a savings bond into an IRA is to have your custodian or trustee buy a new paper bond on your behalf.
U.S Savings Bonds
The Treasury sells two types of savings bonds: Series EE and Series I. Series EE pays a fixed amount of interest for the life of the bond, while Series I offers a mix of fixed and inflation-adjusted interest payments that change over time. Until 2012, you could choose between the purchase of electronic or paper bonds. Electronic bonds reside in your TreasuryDirect account and are not available for IRAs or other accounts. You can still buy paper bonds, but the process is hard, and getting them into an IRA is harder.
You can buy paper Series I savings bonds if the Treasury owes you a tax refund. You’ll have to fill out Internal Revenue Service Form 8888 requesting part or all of your refund be used for the bond purchase. You can buy up to $5,000 in paper bonds per year with this method. If you want an IRA to own these bonds, you must locate a trustee willing to hold them on your behalf. You’ll then need to set up an IRA managed by the trustee and register the bonds in the trustee’s name, for your benefit. For example, you would enter as the owner’s name on Form 8888 “First Intergalactic Bank Trustee U/A John Smith IRA dated 4-11-13."
You cannot add any property to an IRA other than cash. Therefore, you can’t put an existing savings bond into an IRA, either before or after maturity. However, you may be able to roll a savings bond into an IRA from a trustee IRA or another type of qualified retirement account. When you want to cash in your IRA savings bonds, the trustee must make the request and offer to transfer the proceeds to another IRA account or distribute the proceeds directly to you.
You can transfer property, including matured savings bonds, tax-free from a trustee IRA or qualified retirement account, such as a 401(k), to an IRA as long as you observe the rules. If you do a trustee-to-trustee transfer, the property relocates without being distributed to you. If you perform a rollover, you receive a distribution and must contribute it to an IRA or other qualified retirement plan within 60 days. The old trustee will normally withhold 20 percent of your savings bond proceeds to pay the taxes if you fail to contribute within the deadline. You must reach into your own pocket to replenish and contribute the 20 percent, or the IRS will consider it a taxable distribution. You get the withholding back the next time you file a tax return.
- TreasuryDirect: Comparing EE Bonds and I Bonds
- Bankrate: Tough to Buy Series I Bonds for IRA
- Internal Revenue Service Form 8888: Allocation of Refund (Including Savings Bond Purchases)
- TreasuryDirect: Redeeming Paper Bonds Purchased by a Trustee or Custodian as an IRA Investment
- Internal Revenue Service Publication 590: Individual Retirement Arrangements
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