I Bonds, or Series I savings bonds, are low-risk savings instruments issued by the U.S. Treasury. They are designed to offer protection against inflation while ensuring a steady return. The interest earned on an I Bond comprises two components: a fixed rate that stays the same throughout the life of the bond, and an inflation rate that adjusts semi-annually in line with changes in the Consumer Price Index. I Bonds can be purchased electronically via the TreasuryDirect website or with your IRS tax refund. These bonds must be registered under a named individual or entity. Interest earnings are exempt from state and local taxes. An Individual Retirement Account (IRA) is a tax-advantaged account that individuals use to save and invest for retirement. There are several types of IRAs, including Traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs. In a Traditional IRA, contributions are often tax-deductible in the year they are made, but withdrawals in retirement are taxed as ordinary income. A Roth IRA offers no tax deduction for contributions, but qualified withdrawals in retirement are tax-free. Investors often consider incorporating I Bonds into their retirement portfolios because of their low-risk nature and inflation protection. However, when it comes to buying I Bonds within an IRA, the rules set forth by the Internal Revenue Service (IRS) and the U.S. Treasury Department come into play. The IRS has stipulated strict regulations regarding the type of investments permissible within an IRA. These regulations exist to maintain the primary purpose of an IRA, which is to serve as a long-term retirement savings vehicle. Furthermore, these rules are designed to prevent potential misuse of the various tax advantages that IRAs offer. If the IRS permitted all types of investments within an IRA, individuals might use these accounts to invest in assets that are not fundamentally designed for retirement savings, thereby subverting the original purpose of these tax-advantaged accounts. According to these IRS rules, it is not permissible to hold I Bonds within an IRA. This prohibition arises from a fundamental characteristic of I Bonds: they must be registered to a named individual or a specific type of entity. Although an IRA can be considered a type of trust, it does not meet the ownership criteria set by the U.S. Treasury Department: that I Bonds must be registered to named individuals or particular entities such as corporations, trusts, or estates. In this regard, an IRA falls short because it is not a named individual or a specifically recognized entity under the Treasury's regulations. The concept of named individuals is central to the rules and regulations that govern the ownership of I Bonds. The U.S. Treasury's restrictions are based on the fact that I Bonds are intended to be personal investments. This is clearly reflected in the registration process for these bonds, which always requires the investor's name. Beyond this, the U.S. Treasury also imposes limitations on the volume of I Bonds an individual can purchase each year. These limitations further highlight the personal nature of I Bonds as an investment. While I Bonds offer several benefits such as low risk and protection from inflation, the regulations set by the IRS and the U.S. Treasury Department prohibit their inclusion within an IRA. Although this restriction may seem limiting, investors have numerous other investment options for their IRAs that can provide similar benefits to I Bonds. The following alternatives can provide similar benefits as I Bonds, such as inflation protection and potential for growth, while complying with the rules governing IRAs. Similar to I Bonds, TIPS are issued by the U.S. government, providing them with a high degree of safety. A unique aspect of TIPS is that their principal amount adjusts in line with the Consumer Price Index (CPI), thereby offering protection against inflation. While I Bonds compound interest semi-annually, TIPS pay out interest to investors every six months based on the adjusted principal. Therefore, if inflation is increasing, your interest payments from TIPS will increase as well. Importantly, the U.S. Treasury permits the inclusion of TIPS in an IRA, making them an attractive choice for those seeking a low-risk, inflation-protected investment. ETFs that track inflation-protected bonds can be another great investment option within your IRA. These funds primarily invest in inflation-protected securities like TIPS. ETFs offer several benefits, including the ability to trade them like stocks on an exchange, potential for higher liquidity, and lower expense ratios compared to mutual funds. Because they consist of a diversified portfolio of inflation-protected bonds, these ETFs can provide broad exposure to this asset class, reducing the risk associated with investing in individual bonds. They provide a convenient and cost-effective way to add inflation protection to your IRA. Broadening the scope beyond inflation-protection, other bond funds can be valuable additions to your IRA. These can include mutual funds or ETFs that invest in a diversified selection of bonds such as corporate, municipal, and other types of Treasury bonds. Various bond funds have different risk and return profiles, making it important to choose one that aligns with your risk tolerance and investment goals. For instance, corporate bond funds may offer higher returns than government bond funds but come with a higher risk. On the other hand, municipal bond funds may offer tax advantages, making them a compelling choice for investors in high tax brackets. While bonds are known for providing stability and regular income, incorporating stocks and stock mutual funds into your IRA can offer opportunities for significant growth. Despite their higher risk, stocks have historically provided higher returns over the long term than bonds. Investing in individual stocks allows you to potentially profit from the success of the companies you invest in. Mutual funds, on the other hand, provide exposure to a diversified portfolio of stocks, which can help mitigate the risk associated with investing in individual stocks. I Bonds, despite their attractive features of low risk and inflation protection, cannot be held within an IRA due to the regulations set by the IRS and the U.S. Treasury Department. The IRS has established strict rules to maintain the primary purpose of IRAs as long-term retirement savings vehicles and prevent potential misuse of the tax advantages they offer. As I Bonds must be registered to named individuals or specific entities, they do not meet the ownership criteria set by the U.S. Treasury Department. However, investors have alternative options that comply with IRA regulations while providing similar benefits. Treasury Inflation-Protected Securities (TIPS) are issued by the U.S. government and offer protection against inflation, making them an appealing choice for low-risk investments within an IRA. Another option is to consider ETFs that track inflation-protected bonds, providing broad exposure to this asset class while offering benefits such as tradability, liquidity, and lower expense ratios. Furthermore, other bond funds, including those investing in corporate, municipal, or other types of Treasury bonds, can be valuable additions to an IRA, offering diversification and varying risk and return profiles. Investors may also choose to incorporate stocks and stock mutual funds into their IRA, providing opportunities for significant long-term growth, although these options come with higher risk compared to bonds.Overview of I Bonds and IRAs
I Bonds
IRAs
Can I Buy I Bonds in an IRA?
IRS Rules and Regulations Concerning I Bonds and IRAs
Why I Bonds Cannot Be Held Within an IRA
Alternative Investment Options in an IRA
Treasury Inflation-Protected Securities (TIPS)
Exchange-Traded Funds (ETFs)
Other Bond Funds
Stocks and Mutual Funds
Final Thoughts
Can I Buy I Bonds in an IRA? FAQs
No, it is not permissible to buy I Bonds within an IRA. The regulations set by the IRS and the U.S. Treasury Department prohibit holding I Bonds in an IRA due to the ownership criteria established for these bonds.
The IRS and the U.S. Treasury Department have strict rules in place to maintain the primary purpose of IRAs as long-term retirement savings vehicles and to prevent potential misuse of the tax advantages they offer. As I Bonds must be registered to named individuals or specific entities, they do not meet the ownership criteria set by the U.S. Treasury Department, which disallows their inclusion in an IRA.
Although I Bonds cannot be bought within an IRA, there are alternative investment options available that provide similar benefits. These alternatives include Treasury Inflation-Protected Securities (TIPS), which offer inflation protection and can be included in an IRA. Additionally, investors can consider exchange-traded funds (ETFs) that track inflation-protected bonds, other bond funds, or incorporate stocks and stock mutual funds into their IRA for potential growth opportunities.
While you cannot directly purchase I Bonds within an IRA, you may be able to transfer or convert existing I Bonds into an IRA. The process typically involves redeeming the I Bonds and then contributing the proceeds into an eligible IRA account, subject to IRA contribution limits and any applicable tax considerations.
Including Treasury Inflation-Protected Securities (TIPS) in an IRA offers similar inflation protection as I Bonds, but with the added benefit of being permissible within an IRA. TIPS adjust their principal value based on changes in the Consumer Price Index, providing a hedge against inflation. They can be a suitable alternative for IRA investors seeking low-risk, inflation-protected investments.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
