Can an IRA Account Buy Government Bonds?
You can purchase U.S. Treasury Bonds with your Individual Retirement Account (IRA). IRS rules prohibit you from using IRAs to directly purchase foreign government bonds, though you can purchase American securities that have foreign bond holdings. IRAs are types of tax-advantaged accounts: to encourage retirement savings, the federal government gives you a tax break on interest you make from your retirement investments. However, the IRS does not want to cede control of assets you keep in your account; hence, the prohibition on foreign investments.
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You are not taxed on interest your assets earn as long as they remain in your IRA. When you purchase a 30-year Treasury savings bond, you earn interest on it every six months. Ordinarily, you would owe the IRS taxes on the interest you make each year. You could either pay this tax annually or wait until the bond matures. But if you use your IRA to purchase savings bonds, you would not owe taxes on interest the bonds earn.
Benefits
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Because the IRS does not tax assets in your IRA, you can reinvest 100 percent of the interest your bonds earn rather than defer a portion of your earnings to taxes. Over time, this small savings can have a big impact on your nest egg if you let your earnings compound over the life of your IRA.
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Types
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Most individuals open either Roth or traditional IRAs, and each type of account offers a different tax benefit. Contributions you make to your Roth IRA are taxed, but distributions are tax free. You may be eligible to write off your traditional IRA contribution, but distributions are taxed at your normal income tax rate. Therefore, if you use a Roth IRA to purchase a savings bond, you would not end up owing any taxes on the interest it accrues at the time of withdrawal. If you purchase a savings bond with a traditional IRA, the bond's earnings would be taxed at your income tax rate when you withdraw the funds.
Considerations
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IRAs are established by the U.S. tax code, but the IRS requires you to keep your account with an accredited IRA trustee. Most often, IRA trustees are banks, mutual funds, brokerage firms and insurance companies. Your investment options are limited to the financial products your trustee offers, and most trustees do not allow you to purchase Treasury bonds with your IRA. Rather than go with a financial institution, may have to find a self-directed IRA custodian that is willing to handle the transaction.
Function
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Your IRA trustee must purchase savings bonds from the Federal Reserve with your contribution dollars, which the Federal Reserve will send directly to your custodian. The bonds will have your Social Security number and your name, in addition to that of your IRA trustee.
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