I Bonds have quickly become a powerful way for millions of Americans to generate strong guaranteed returns in a volatile investment marketplace. Electronic I Bonds can generally be purchased by individuals and entities, but the looming questions persists, can I Bonds be purchased by a Self-Directed IRA or Solo 401(k) plan. In this article I will address this question in detail.
- I Bonds offer a strong, guaranteed return
- Trusts, like an IRA or 401(k), can purchase I Bonds, but only electronic ones
- It is possible to use retirement funds to invest in I Bonds
What is an I Bond?
According to Treasury Direct, a Series I savings bond is a type of security that earns interest based on both a fixed rate and a rate that is set twice a year based on inflation. The bond earns interest until it reaches 30 years or you cash it, whichever comes first.
What is the interest rate on an I Bond Today?
For the first six months one owns an I Bond, the Series I bond from May 2022 through October 2022 earns interest at an annual rate of 9.62 percent. A new rate will be set every six months based on this bond’s fixed rate (0.00 percent) and on inflation.
Who Can Own I Bonds?
In general, individuals and entities can only buy I Bonds. In the case of an individual, the individual must have a Social Security Number and must satisfy the following conditions:
- United States citizen, whether living in the US or abroad
- United States resident
- Civilian employee of the US, no matter where you live
For children under the age of 18, a parent or other adult custodian may open for the child a Treasury Direct account that is linked to the adult’s Treasury Direct account.
In the case of entities, such as LLCs and corporations, and trusts, only electronic I Bonds, and not paper I Bonds, can be purchased.
IRAs and I Bonds
Because an IRA is not an individual and does not have a social security number, in general, an IRA, Roth IRA, SEP IRA, or SIMPLE IRA cannot directly own an I Bond. Unfortunately, the Treasury Direct application process requires the applicant to have a social security number. Likewise, an IRA is not an entity. However, an IRA can be considered a trust under Internal Revenue Code Section 501.
Hence, so long as the IRA has a tax identification number, it could be possible for the IRA to apply for an I Bond using Treasury Direct. The application process does not request information on the IRA custodian, but simply requests information on the account manager, which can be the individual IRA owner.
Self-Directed IRA LLC & I Bonds
Just like an IRA can technically be treated as a trust and use Treasury Direct to purchase I Bonds, a retirement investor can establish a Self-Directed IRA LLC to purchase I Bonds.
Under the Self-Directed IRA LLC, also known as the Checkbook IRA, a limited liability company (“LLC”) is created which is funded and owned by the IRA, and managed by the IRA holder.
Therefore, using Treasury Direct, the IRA owner can apply using the LLC name and LLC tax identification number. Treasury Direct does not request information on the owner of the LLC (the IRA), but simply requests info on the account manager, which can be the individual IRA owner.
There is no guarantee that Treasury Direct will accept the submitted application in the name of the IRA or the Self-Directed IRA LLC. However, many IRA Financial clients have successfully purchased I Bonds with a Self-Directed IRA using Treasury Direct. IRA Financial clients using a Checkbook IRA to purchase I Bonds have had greater success with the account application process on Treasury Direct.
Solo 401(k) & I Bonds
Like an IRA, a 401(k) plan is defined as a trust. Hence, technically a 401(k) should be able to purchase I Bonds via the Treasury Direct platform. However, establishing a Treasury Direct account for a 401(k) plan with multiple employees could prove cumbersome because the account would have to be established for all interested participants and the plan trustee would need to be involved in the account opening process.
Whereas, in the case of a Solo 401(k), also known as an Individual 401(k) plan, there is only one interested participant – you.
Using the Treasury Direct portal, a Solo 401(k) plan can establish an account in the name of the 401(k) trust, and the plan participant can serve as the account manager. For purposes of Treasury Direct, it would be helpful if the plan name included the word “trust” in the title. For example, the ABC 401(k) Trust, or the ABC Inc. Trust. A business has quite a bit of flexibility in naming a 401(k) plan.
For example, if John Smith wanted to purchase I Bonds for the John Smith 401(k) Trust, he would submit the application using Treasury Direct as John Smith, Trustee of the John Smith 401(k) Trust. John Smith would then include his personal info under “Account Manager.”
Like in the case of an IRA, there is no guarantee that Treasury Direct will accept the submitted application as a “trust” in the name of the Solo 401(k). However, many IRA Financial clients have successfully purchased I Bonds with a self-directed solo 401(k) using Treasury Direct.
How Much Does an I Bond Cost?
In a calendar year, one can acquire:
- up to $10,000 in electronic I Bonds in Treasury Direct
- up to $5,000 in paper I Bonds using your federal income tax refund
Items to Consider:
- The limits apply separately, meaning one could acquire up to $15,000 in I Bonds in a calendar year
- Bonds you buy for yourself and bonds you receive as gifts or via transfers count toward the limit. Two exceptions:
- If a bond is transferred to you due to the death of the original owner, the amount doesn’t count toward your limit
- If you own a paper bond issued before 2008, you can convert it to an electronic bond in your account in Treasury Direct regardless of the amount of the bond.
How can I Buy I Bonds?
The most popular way to buy I Bonds, and the only way they can be purchased using an LLC or trust, is in electronic form using the TreasuryDirect online portal. Interest on I Bonds are subject to federal income tax.
Why Are I Bonds So Popular?
With financial markets in flux in 2022, gaining the ability to earn almost 10% on an investment seems almost too good to be true. Add the fact that the bonds are secured by the US Government, you can understand why so many Americans are looking to find ways to get more of their savings into I Bonds.
The downside to the I Bond investment strategy, is that one is capped at $15,000 a year. Although, the limit would be $10,000 for entities and trusts.
It is unclear whether the Treasury intended for IRA and 401(k) plans to be eligible to purchase I Bonds using Treasury Direct. There does not seem to be any clear prohibition, although, there is no direct endorsement of the use of retirement accounts to purchase I Bonds. That being said, many IRA Financial clients either using a Self-Directed IRA LLC or Solo 401(k) plan find it worth their time to apply to purchase I Bonds using Treasury Direct