Money Market Accounts:
What You Didn't Learn in School
Dear Jeff:
If I place a discounted Corporate Bond in my IRA, what parts of it can I not touch without having the 10 percent penalty kick in? In other words, can I receive the coupon payment each year and do with it whatever I want without that part being considered a withdrawal? Shouldn't just the increase in value on the bond itself when it matures be considered the taxable event?
Jeff Says:
Interest received from bonds held in an IRA must be reinvested in and accumulated under the IRA umbrella. The investor cannot receive the interest income directly without incurring the 10 percent early withdrawal penalty, assuming he or she is less than 59 years old. The owner of the bond at the time that the interest accrues is entitled to receive the interest.
Even if you sell the bond prior to the time that the interest is actually paid, you will still receive a pro-rated portion of the interest when it is ultimately paid. The key point that I am making here is that the actual bond owner is the custodian of the IRA itself, not you, the participant. Therefore, you cannot avoid the penalty if you receive the interest and you are less than age 59.
For more on IRAs, consult ThirdAge's Retirement Planning Financial Basics.
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