What Is an IRA Bond?

An individual retirement account bond is a special type of savings bond with features similar to a traditional IRA. Although an IRA bond is a paper security, not a savings account, the Internal Revenue Service treats it as a form of traditional IRA. If you own or inherit IRA bonds, becoming familiar with them will help you make the most of this investment type and avoid IRS penalties.


IRA bonds come in two forms -- individual retirement bonds and retirement plan bonds. The terms and conditions are virtually the same for both types. The federal government stopped selling IRA bonds after April 1982, but many are still in circulation. IRA bonds are nontransferable and can be redeemed only by the owner, an authorized representative of the owner or a beneficiary who has inherited IRA bonds.


IRA bonds do not have a fixed maturity date. Instead, a bond earns interest until you reach age 70 1/2. When you die, the bond continues to earn interest for five years after the day you die or the day you would have turned 70 1/2, whichever comes first. Interest accrues, meaning it is added to the principal of the bond. The interest earnings are not taxable until an IRA bond is redeemed. However, if you redeem an IRA bond before you are 59 1/2 years old, you may be charged a 10 percent penalty tax in addition to ordinary income taxes due on the accrued interest.


All IRA bonds were sold at face value. Individual retirement bonds were available in denominations of $50, $75, $100 and $500. Retirement plan bonds had face values of $50, $100, $500 and $1,000. Normally, you can only put cash into a traditional IRA or retirement plan like a 401(k). But the IRS allows you to roll over IRA bonds into retirement plans such as these without losing the tax-deferred status of your money or incurring an interest penalty.


IRA bonds can usually be cashed in at a bank or credit union, just like other paper savings bonds. Treasury Direct suggests you talk to a financial adviser before doing this, however, so you avoid adverse tax consequences. If you can't redeem the bonds at a bank, contact the Federal Reserve Bank of Minneapolis at 800-553-3663. If you prefer to write the bank, the address is P.O. Box 214, Minneapolis, MN 55480.