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Grow Your Money with TIPS

If you have already purchased your limit of I Bonds - what else is out there that will give us inflation protection? Treasury Inflation Protection Securities TIPS.

So you have already purchased your limit of I Bonds.  What else is out there that will allow you to slay that pesky inflation?  Treasury Inflation Protection Securities TIPS.

What Are TIPS

Treasury Inflation Protection Securities or TIPS are a type of Treasury bond that is indexed inflation. This will protect you from a decline in the purchasing power of your money from inflation.

According to the government website,

“Unlike other Treasury securities, where the principal is fixed, the principal of a TIPS can go up or down over its term.

When the TIPS matures, if the principal is higher than the original amount, you get the increased amount. If the principal is equal to or lower than the original amount, you get the original amount.

TIPS pay a fixed rate of interest every six months until they mature. Because we pay interest on the adjusted principal, the amount of interest payment also varies.”

What is the Difference Between Treasury Inflation Protection Securities and I Bonds

TIPS are a little more complex than I bonds but they are worth considering.  The biggest difference for income seekers is TIPS pay interest every six months while you hold them whereas I Bonds don’t pay you income while you own the bond. Rather, the interest accrues and gets paid out when you sell or the bond matures.  Both TIPS and I bonds use the Consumer Price Index for All Urban Consumers (CPI-U) to adjust for inflation.  TIPS adjusts the bond principal and I Bonds adjusts the inflation portion of the interest rate.

 TIPSI Bonds
Interest Paidevery six monthsat maturity
Interest RatefixedInflation rate adjusts with inflation, there is also a fixed component
Principaladjusts with inflationfixed
Maturity5, 10, or 30 years30 years but you can cash them in after 12 months
Taxes on InterestFederal tax is due each year on interest and the adjusted principal unless held in a tax-shielded account. No state or local taxes.Most people choose to pay taxes on the accrued interest when the I bond is cashed in.  You pay Federal tax but no state or local taxes.
Purchase LimitsYou can buy up to $10 million worth of TIPS at auction and an unlimited amount in the secondary market. $10,000 per year, I plan to write a blog post soon on how I bought more than $10k of I bonds
Ability to buy and sell in the secondary marketyesno or

Most people consider both TIPS and I Bonds to keep inflation at bay. I have bought both. The I Bond fixed rate is now at a decade high.

How to Buy TIPS

You can buy TIPS directly from the government at or through a brokerage firm like Fidelity.  I prefer to purchase TIPS in my IRA.  This way any interest payments and principal adjustments are not taxable until distributions are taken from my Traditional IRA.  Better yet, if you purchase TIPS in a ROTH IRA the interest is not taxed at all.  If you want to buy TIPS in an IRA you need to make the purchase through a brokerage firm. If you are thinking of buying TIPS in a taxable account, be sure to research the “phantom income” from the principal adjustments prior to any purchases.

If you want more detailed information. Here is a link to a video from Diamond Nest Egg that includes how to buy tips both at treasurydirect and Fidelity.  It is 30 minutes long so it gets into much more detail than this blog post.

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