An Individual Retirement Account is a tax-advantaged savings account that is typically used for long-term retirement savings. Except for the tax benefits, an IRA is very much like a regular taxable investment account, although there are some limited restrictions on the types of investments you can buy in an IRA. Government bonds may be purchased in an IRA and can be suitable investments if you are a conservative investor looking for income.
Step 1
Determine your investment objectives and risk tolerance. Generally speaking, government bonds are a conservative investment, so if you are an aggressive investor you might not even want to purchase them in your IRA. However, even if you seek maximum capital growth in your investments, there are instances when government bonds may be an appropriate purchase to help diversify your account and reduce overall portfolio risk.
Step 2
Research the types of government bonds. Government bonds pay different rates of interest and have varying maturity dates, or dates when the government pays you back your invested capital. The longer the maturity date of a bond, the more volatile the price tends to be. However, in exchange for this price variability you usually receive the highest rate of interest on long-term bonds. Other bonds, known as I-bonds, pay interest rates that rise and fall with the rate of inflation. Depending on your investment needs, some government bonds may be more or less appropriate for your portfolio.
Step 3
Assess your overall portfolio. Once you have researched your government bonds, determine how they will affect your overall investment strategy. For example, if you already have a large government bond portfolio in your taxable investment account and you are considering purchasing more bonds in your IRA, understand that the IRA bonds will not help to diversify your overall portfolio, as you are simply buying more of the same type of investment.
Step 4
Take advantage of IRS tax benefits. Bonds are considered income investments, meaning that they primarily provide gains in terms of interest payments rather than capital appreciation. As an IRA is a tax-deferred investment account, you will not have to pay annual income tax as you receive bond interest payments, but only when you take withdrawals from the account. Thus, you may consider putting your income investments, such as government bonds, in an IRA rather than in a taxable income account. However, if you need to use the income as it is paid, recognize that you cannot take withdrawals from your IRA before age 59 1/2 without paying a ten percent penalty, in addition to ordinary income tax, according to IRS Publication 590.
Step 5
Choose primary or secondary government bonds. Primary government bonds are sold at auction directly from the government, usually with no commission and only a small processing fee. For bonds bought at auction, you will not know the exact interest rate you will receive until the auction concludes. Secondary government bonds are available from bond traders or other investors, much like corporate or municipal bonds. With secondary bonds, you will see what the offered interest rate and prices are, and you will usually have to pay a commission to purchase the bonds.
Step 6
Contact your financial services firm. Once you have determined that government bonds are the appropriate investment for your IRA, put in an order with your financial adviser, or if you are approved to do so, over your firm's online trading platform. Bonds are sold in $1,000 increments, so if you put in an order for ten bonds, your cost will be roughly $10,000 for a government bond. Prices will be slightly higher or lower based on where current market interest rates are, and how long it has been since the bond paid an interest payment.
Things You'll Need
- IRA account
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