TIPS for Savings and Investing

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TIPS, otherwise known as Treasury Inflation Protected Securities, adjust the yield for inflation and are an alternative to other types of savings and investing vehicles. If you have an extra $100 to invest each payday, TIPS can be a good way to get a greater yield than a savings account. They can be used to build up a retirement account or just provide some reassurance that your investment’s value won’t diminish due to inflationary pressures that can diminish your money’s buying power, thus reducing the effective wealth.

How TIPS Work

The securities can be bought online or through banks or brokers. There are different maturity terms: 5, 10, and 30 year terms. Not all people sell all terms. You will have to have a minimum of $100 to invest and can only invest in multiples of $100. The TIPS principal is adjusted for inflation, increasing when inflation sets in as measured by the Consumer Price Index. It will also decrease if deflation sets in. TIPS pay out interest two times each year, also adjusted for inflation. The final value will end up being the coupon face value plus accrued interest. If inflation ate away at the value of your other investments at least you had a portion of your wealth diversified into bonds set up to protect some of your portfolio from the ravages of inflation.

Tax Implications

You do have to pay federal taxes on the interest yield in the same year it is paid out, even if the bond doesn’t fully mature for years later. You don’t have to pay state or local income taxes, however. You can also sell the security before it matures, although it’s unlikely you’ll get full value. If you are not sure exactly how to handle the income from TIPS seek out an accountant familiar with this investment vehicle.