How to Convert IRA Funds to Government Bonds
An IRA account is simply a legal envelope into which you can deposit money and investment securities such as stocks and bonds. You can buy government bonds in your IRA account, using the cash in that account to pay for the bonds. If your IRA is managed by a mutual fund or insurance company, you probably have a mutual fund choice available that invests in government bonds.
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Instructions
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Buying Government Bonds in your IRA
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Free up cash in your IRA account. A self-directed IRA is usually held by a brokerage firm, and you make the decisions regarding what you will buy in that account. You may have to raise cash in your IRA by selling something already in the account. Once you have cash, you can purchase government bonds with that cash. Ask your broker for assistance in this process.
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Buy government bonds with your bank-held IRA. If you hold your IRA account in a bank, you may have the money in that account invested in certificates of deposit (CDs). Unless the IRA plan at the bank specifies CD investments only, there is no reason you cannot purchase government bonds in that account. Ask your branch manager about the procedures for doing that at your bank.
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Choose a fund that contains government bonds. Most mutual fund companies and insurance companies that act as trustees for IRAs offer only money market funds and mutual funds to choose from in their IRA accounts. If this is the kind of IRA account you hold, there are probably several types of bond funds from which you may choose, including short term, intermediate term or long term government or corporate bond funds. You may have to sell one or all of the investments you already own in that account in order to purchase a position in a fund that invests in government bonds.
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Transfer or roll your funds over into a more versatile account if your IRA account cannot accommodate an investment in government bonds. Look for a self-directed IRA, which is normally available through a brokerage firm or a bank investment division.
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Decide which maturity to buy. Treasury bills mature within a year. Treasury notes have maturities out to ten years, and treasury bonds have maturities that range out to thirty years. Unless you are purchasing your bonds during times of very high interest rates and you have at least thirty years until you retire, you should not purchase a bond longer than ten years.
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Tips & Warnings
Interest income from U.S. Treasury bonds is not taxable for state income tax purposes so many advisers suggest against holding these bonds in your tax-deferred accounts because the interest paid is usually lower than that paid by fully taxable corporate bonds. Your accountant can give you advice on whether this is an important consideration for you. If you are mainly concerned with keeping your retirement money safe, a treasury bond held to maturity is a very safe investment.
Even U.S. Treasury bonds can fluctuate in price with the market. They are guaranteed by the U.S. Government with respect to the timely payment of interest and repayment of principal at maturity, but if you sell your bond before maturity it may not be worth what you paid for it. The only way to make sure you receive all the money you have invested is to purchase only discount or par bonds and hold them to maturity. If you pay a premium for a bond, you will only receive the par value of $1000 per bond at maturity.
