Bonds & fixed income

What it is

Fixed income covers debt instruments that pay interest on a schedule and return principal at maturity — U.S. Treasuries, agency and corporate bonds, certificates of deposit, and bond funds. They are typically used for income and to dampen portfolio volatility.

Holding it in a self-directed IRA

Bonds and bond funds are held in the IRA and purchased through the account. Interest accrues inside the account without current tax in a Traditional IRA, or tax-free in a Roth, so otherwise-taxable interest compounds without annual drag.

Requirements

Instruments are purchased through the IRA and titled in its name.
Interest and maturity proceeds are paid into the IRA.
The account holds enough cash to settle purchases.

Limitations and prohibitions

Municipal bonds are generally a poor fit — their federal tax exemption is wasted inside a tax-advantaged account.
Some bonds carry high minimum denominations, and secondary-market liquidity varies by issue.
Individual bonds carry credit and interest-rate risk; longer maturities are more rate-sensitive.
You cannot transfer bonds you hold personally into the IRA outside of a rollover.

Valuation and liquidity

Bonds are priced from market quotes or matrix pricing; Treasuries and large corporates are liquid, while smaller or lower-rated issues can be harder to sell. CDs are held to maturity or subject to early-withdrawal terms.

Tax considerations

Fixed income is often deliberately placed inside tax-deferred accounts precisely because interest — taxed at ordinary rates outside — compounds untaxed within.

A worked example

Your IRA buys a $10,000 corporate bond paying 5%. The $500 of annual interest — taxed at ordinary rates in a taxable account — compounds untaxed in the IRA until you take distributions.

IRS forms & records

Form 5498 — contributions and fair-market value.
Form 1099-R — distributions, including required minimum distributions.

Common mistakes that can cost you

Holding municipal bonds in an IRA — the federal exemption adds no value inside the account.
Overlooking call risk and credit risk on individual issues.
Building a maturity ladder without keeping enough liquidity for RMDs.

Before you invest

You’ve matched the bond’s purpose (income vs. ballast) to the account.
Credit quality and call features are understood.
It isn’t a municipal bond.
There’s liquidity to cover required distributions.

Authorities

IRC § 408 — individual retirement accounts.
IRS Publication 590-B — distributions and RMDs.

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