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Ask Dr. Don

IRA investing with savings bonds

Dear Dr. Don,
Can you purchase Series I savings bonds with IRA money?
Ron Retirement

Dear Ron,
You can fund an IRA account with Series I savings bonds, but the organization that is acting as the trustee or custodian on the account has to accept savings bonds as investments in the account.

The trustee or custodian completes Form PDF 5374-1, Order for Series I U.S. Savings Bonds to be Registered in Name of Fiduciary. The funds are transferred by the trustee or custodian to the Federal Reserve Bank for processing, and the bonds are sent to the trustee or custodian. The bonds are registered using your Social Security number but are in the name of both you and the trustee or custodian for your benefit.

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According to IRS Publication 590, Individual Retirement Arrangements, "The trustee/custodian must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian."

Alternately, you could invest in the Treasury Inflation Indexed bonds. These U.S. Treasury securities have been issued in five-year, 10-year and 30-year maturities. There are some drawbacks to holding TII bonds in taxable accounts, mainly that you have to pay income tax on investment returns that you won't realize until the security is redeemed or matures, but that isn't a problem in tax-advantaged Roth and traditional IRA accounts.

You can't use the Treasury Direct program to buy TII bonds in an IRA account unless your bank is willing to act as custodian for your Treasury Direct account, which most banks are unwilling to do. You can, however, buy these securities in a self-directed IRA account held at a brokerage firm.

There are also mutual funds that invest in TII bonds, such as Vanguard Inflation Protected Securities (VIPSX), 59 Wall Street Inflation-Indexed Securities Fund (BBHIX) and American Century Inflation-Adjusted Treasury Fund (ACITX).

I didn't have any luck on the Internet finding financial institutions that indicated they would accept savings bonds or Treasury Direct purchases of U.S. Treasury securities in IRA accounts. There's nothing really in it for the firms to promote this service, so you'll have to shop around. Start with the financial institutions that you currently do business with, especially your credit union.

-- Posted: March 7, 2002

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See Also
Buying savings bonds via payroll deductions
When to tap your retirement fund early
The best time to cash savings bonds
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