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

IRS forms & records

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

Common mistakes that can cost you

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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