Can I Roll Over Treasury Bonds to a Roth IRA?

Debt issued by the U.S. Treasury is free from default risk, making it a popular instrument for conservative investors. Treasury bonds mature in 10 to 30 years, are free from state and local taxes, and pay a lower interest rate than corporate bonds. You might be able to roll over Treasury bonds if they currently reside in a retirement account.

Roth IRA

A Roth individual retirement account allows you to contribute money on which you've already paid taxes. You can withdraw contributions any time without taxes or penalties. However, you must hold the account for at least five years and reach age 59 1/2 to avoid taxes and penalties on withdrawn earnings. Otherwise, you can remove earnings tax-free. You can contribute only cash to an IRA, but you can transfer property such as Treasury bonds from an existing IRA or employer savings plan to a Roth IRA.

Non-Sheltered Bonds

If you own Treasury bonds outside the tax-sheltered environs of a qualified retirement arrangement, you can sell them, contribute the proceeds to a Roth IRA and then repurchase the bonds. You'll owe taxes on any resulting capital gains. However, if you sell the bonds at a capital loss and repurchase them within 30 days, the IRS flags a "wash sale" and disallows the tax benefits of the loss. If you wait more than 30 days to repurchase, or if you purchase different bonds, you can use a capital loss to offset capital gains and up to $3,000 of ordinary income. You can carry over excess capital losses to future tax years.

Roth Conversion

You can convert a retirement account to a Roth IRA, but will have to pay taxes on any deductible contributions and all earnings that make up the converted amount. However, if your existing account is of the Roth type, such as a Roth 401(k) plan, a rollover does not create taxable income. You can transfer the same properties from the existing plan to the new one. If you withdraw amounts from your existing retirement account, you have 60 days to complete the rollover or the IRA might treat it as a taxable distribution and might apply a 10 percent penalty. A safer route is a trustee-to-trustee transfer, in which the existing account's custodian directly transfers your cash and property to the Roth IRA custodian.

Considerations

Treasury bonds are among the lowest yielding forms of long-term debt. Since IRAs are structured to encourage you to save for the long term, you might want to consider how much of your portfolio you want to devote to low-yielding investments. From 1928 through 2012, the annual average return on T-Bonds was 5.38 percent, compared with 11.26 percent for stocks. T-Bonds and other Treasury debt might make up the risk-free portion of your retirement portfolio. However, modern portfolio theory suggests you diversify with a spectrum of different types of assets to achieve the most efficient mix of risk and return.