01:00 AM EDT on Sunday, June 5, 2005

Q: I would like to buy a Series I bond and use it as part of a retirement account contribution for an IRA, Roth IRA or SEP. Is this possible?

M.R., Tiverton

A: It's possible, but it may not be practical. Here's the deal:

Contributions: In general, you may contribute only cash to an IRA, federal tax law says. Except in the case of a rollover contribution (from another IRA, for example, or from a retirement-savings plan at work), "no contribution will be accepted unless it is in cash," the law says.

Investments: Once you've contributed to an IRA, you can invest those dollars in just about anything you want. (There are some restrictions, but they don't affect most people.)

Thus, you may invest your IRA dollars in a certificate of deposit or in mutual fund shares, for example. You may also invest your IRA dollars in U.S. Savings Bonds, including Series I bonds, a U.S. Treasury lawyer said.

The savings bond wouldn't be registered in your name alone. In general, it would have to be registered in the name of a bank or other financial institution that serves as the trustee or custodian of your IRA. (For instance, the registration might read: "Bank X, Trustee for John Jones IRA," then list the account number.)

But there are some practical issues. For example, only paper savings bonds may be held inside your IRA; savings bonds held electronically aren't eligible, at least not yet, the Treasury lawyer said.

Also, it may not be easy to find a trustee or custodian who'd do this for you. Some banks and credit unions, for instance, might not want the paperwork and recordkeeping involved, especially for smaller accounts, said Angela M. Thomson, head of the Financial Planning Association (Rhode Island chapter), a trade group for financial planners and others.

It's labor-intensive and "probably not profitable for them," said Thomson, a Certified Financial Planner practitioner in Lincoln.

Some firms specialize in serving as trustee or custodian for people who want their IRAs to hold real estate or other specialized types of investments. But they do so for a fee, which may well be more than what your savings bonds would earn, Thomson said. (New Series I bonds currently earn interest at an annualized rate of 4.8 percent.)

Other Considerations: A traditional IRA is a kind of tax shelter. The money your account earns doesn't get taxed each year, as it would in an ordinary savings account. Instead, you get to postpone -- to "defer" -- tax until you make a withdrawal. (Withdrawals from a Roth IRA may qualify for tax-free treatment, depending on the circumstances.)

A savings bond also allows for the possibility of tax deferral. You need not pay federal income tax each year on the interest your bond earns. Instead, you may postpone tax consequences until you cash in your bond. (At that point, the interest your bond has earned will be subject to federal income tax, but not state or local income tax.)

It generally doesn't make much sense, therefore, to own a savings bond inside an IRA, Thomson said in an interview at Coastal Financial Planning Inc., her fee-only financial-planning firm in Lincoln. In other words, it typically doesn't make sense to hold a tax-advantaged investment inside a tax-advantaged account. It'd be like wearing both a belt and suspenders.

You're probably better off investing your IRA dollars in something that can earn more than a savings bond over the long haul, Thomson said. She generally recommends dividend-producing stocks and other such assets for ordinary taxable accounts. She recommends that an IRA hold things that are more geared to capital appreciation, such as growth-oriented stocks and mutual funds.

TODAY'S TIP: Hurricane season has just begun, and your homeowner's insurance policy doesn't cover you for flooding.

What to do? You may qualify for coverage through the National Flood Insurance Program, a self-supporting system run by the Federal Emergency Management Agency. (Claims and operating expenses are paid from policyholder premiums).

The program generally offers federally backed flood insurance to homeowners, renters and business owners. There are more than 4.4 million flood insurance policies in force. The average cost for a policy is $400 a year (but could be higher, depending on your property's location).

For more information, call the program toll-free at 1-800-427-2419, or see its Web site:

www.floodsmart.gov

Neil Downing is a Journal staff writer and author of The New IRAs and How to Make Them Work for You. Questions about your money matters? Call us at 1-401-277-7484 and leave a message, or e-mail:

moneyline [at] projo.com

Sorry, no personal replies; as many questions and issues as possible will appear here.