At IRA Financial, we are frequently asked, can you rollover savings bonds – I Bonds – into an IRA?
One of the more popular ways to fund an IRA is via a transfer or rollover. In general, you can transfer, tax-free, assets (money or property) from other retirement programs (including traditional IRAs) to an IRA. There are over $500 billion of rollovers done every year. Other than directly contributing to an IRA, the rollover is the only other way to add assets to an IRA, including saving bonds.
There are two types of IRA rollovers: (i) direct and (ii) indirect. Rollovers can be done in cash or in-kind (moving the asset without liquidating).
Direct Rollovers
A direct rollover (or transfer) occurs when retirement assets are sent directly from one plan custodian to another. They are tax-free and can be done an unlimited amount of times and are not subject to a withholding tax.
Indirect Rollovers
An indirect rollover occurs when the assets are transferred to the account owner first instead of directly to the custodian. An indirect IRA rollover can be done only once every 12 months. The IRA owner needs to re-contribute the amount of funds received to a retirement plan within 60 days. If cash is received then cash must be re-contributed (same goes for in-kind assets, like I Bonds). Failure to do so will trigger a tax and 10% penalty if you are under the age of 59 1/2.
Savings Bonds – I Bonds
U.S. savings bonds are debt securities issued by the United States Department of the Treasury to help pay for the U.S. government’s borrowing needs. Savings bonds are considered one of the safest investments because they are backed by the full faith and credit of the United States government. The most popular form of saving bonds is the I Bond. Series I savings bonds protect an individual from inflation. With an I Bond, the owner receives a fixed rate of interest and a rate that changes with inflation. Twice a year, the U.S. Treasury Department adjusts the inflation rate for the next 6 months.
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
What is the interest rate on an I Bond Today?
As of April 2024, the interest rate is 5.27%. A new rate will be issued come November, and last six months. This cycle continues every year.
IRAs and I Bonds
An IRA is not an individual and does not have a social security number. The Treasury Direct application process requires the applicant to have a social security number. Likewise, an IRA is not an entity, but may be deemed a trust under Internal Revenue Code Section 408:
“For purposes of this section, the term “individual retirement account” means a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries.”
The Treasury Direct 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 an I Bond, a retirement investor can establish a Self-Directed IRA LLC to purchase an I Bond.
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.
Solo 401(k) & I Bonds
Like an IRA, a 401(k) plan is defined as a trust pursuant to IRC Section 401:
“A trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under this section.”
Hence, a 401(k) should be able to purchase I Bonds via the Treasury Direct platform. 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; a business has quite a bit of flexibility in naming a 401(k) plan.
Saving Bonds Rollover Rules
Savings bonds, or I Bonds, are a conservative investment that brings in expected returns that may have a place in everyone’s portfolio (speak to your financial advisor). If you do hold them in a retirement plan, they can be rolled over or transferred to another one. A saving bond is treated as property just like stocks or real estate and can be rolled over in-kind. Logically speaking, a direct rollover is the best option, as there’s no real reason to take personal possession of them temporarily. This way, you don’t need to worry about the 60-day indirect rollover rule and potential taxes. So, if you do have savings bonds held inside of a retirement account and want to move them, don’t fret, you have options for doing so.