At IRA Financial, we are frequently asked, can you roll over 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 and considering the interest income implications.

Rollovers

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 only be done once every 12 months. The IRA owner needs to re-contribute the amount of funds received to a retirement plan within 60 days (the “60-day rule”). 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.

One of the most popular forms 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 that is adjusted every six months. The inflation adjustment feature of I Bonds ensures that the bond’s value keeps pace with inflation, providing a hedge against rising prices.

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?

The interest rates on I Bonds are 3.11%. A new rate will be issued in May 2025, 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. A Treasury Direct account allows the IRA owner to purchase and manage various Treasury securities, including savings bonds, directly from the U.S. Treasury.

Self-Directed IRA & 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 to purchase an I Bond. Using TreasuryDirect, the IRA owner can also purchase newly issued securities directly from the Treasury during scheduled auctions.

When utilizing a Checkbook IRA, a limited liability company (“LLC”) is created which is funded and owned by the IRA and managed by the IRA holder. Through 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 hold paper savings bonds, the interest on these bonds is reported through the 1099-INT form when the bond is cashed or matures.

If you do hold them in a retirement plan, they can be rolled over or transferred to another one. The savings bond interest can potentially be tax free if used for qualified higher education expenses. A saving bond is treated as property just like stocks or real estate and can be rolled over in-kind.

Earnings on savings bonds held within an IRA are tax deferred until withdrawal, providing a significant tax advantage. 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 I bonds held inside of a retirement account and want to move them, don’t fret, you have options for doing so.

Tax Implications of I Bonds

I bonds are subject to federal income tax, but there are some exceptions and considerations to keep in mind. The interest earned on I bonds is taxable, but it can be exempt from federal income tax if used for qualified higher education expenses. This exemption applies to the interest earned on I bonds issued after 1989.

To qualify for the exemption, the bond owner must have reached age 24 before the bond issue date, and the bond must be registered in the owner’s name. The bond owner can also list a beneficiary on the bond, but the beneficiary cannot be a co-owner.

If the bond owner redeems the I bond to pay for qualified higher education expenses, the interest earned on the bond is tax-free. However, if the bond owner redeems the I bond for any other reason, the interest earned on the bond is subject to federal income tax.

It’s also worth noting that I bonds are not subject to state or local taxes, making them a tax-efficient investment option.

Transferring Treasury Securities to an IRA

Transferring Treasury securities to an IRA can be a bit complex, but it’s a great way to diversify your retirement portfolio. Here are the steps to follow:

1. Check with your financial institution: Before transferring Treasury securities to an IRA, check with your financial institution to see if they offer this service. Some institutions may have specific requirements or restrictions.
2. Gather required documents: You’ll need to gather the required documents, including the Treasury security certificate, your IRA account information, and a transfer request form.
3. Complete the transfer request form: Fill out the transfer request form, which will require your personal and account information, as well as the details of the Treasury security you want to transfer.
4. Submit the transfer request: Submit the transfer request form to your financial institution, along with the required documents.
5. Wait for processing: The transfer process can take several weeks, so be patient. Once the transfer is complete, you’ll receive confirmation from your financial institution.

It’s also important to note that there may be fees associated with transferring Treasury securities to an IRA, so be sure to check with your financial institution for more information. Work with IRA Financial to help with facilitate the transfer or rollover.

Reporting I Bond Rollovers to the IRS

If you roll over an I bond into a qualified education account, such as a 529 plan or a Coverdell ESA, you’ll need to report the rollover to the IRS. Here’s how:

1. Complete Form 8815: You’ll need to complete Form 8815, which is used to report the exclusion of interest from Series EE and Series I savings bonds.
2. Attach Form 8815 to your tax return: Attach the completed Form 8815 to your tax return, along with a copy of the I bond certificate and any other required documentation.
3. Keep records: Keep records of the I bond rollover, including the date of the rollover, the amount rolled over, and the qualified education account into which the funds were rolled.

It’s also important to note that you’ll need to report the interest earned on the I bond on your tax return, even if you roll it over into a qualified education account. However, the interest earned on the I bond will be tax free if used for qualified higher education expenses.