TIPS

Question: Chris has recommended TIP (Treasury Inflation Protected somethings!) in the past. With the amount of money flowing into the economy from the various rescue plans I am concerned inflation is going to be a big factor in a few years, does he still recommend them? Thanks, Simon, Raleigh NC

Answer: Do I still like Treasury Inflation Protected Securities or TIPS? You betcha. The impact from high and rising inflation--the scenario you're worried about--is what TIPS are designed to protect you against. TIPS are default-free government-issued inflation-indexed bonds that come in 5, 10 and 20 year maturities. (The maturity date of a bond is when you get back the principal amount you invested and interest payments stop.) TIPS offer a fixed interest rate above inflation, as measured by the consumer price index. An additional advantage of TIPS is that they also offer a hedge against deflation--a decline in the overall price level of goods and services--by offering a "deflation floor" that protects principal value. TIPS are an investment for all seasons. They won't make you rich. But $1 saved today will be worth $1 in 5, 10 or 20 years--plus some interest.

TIPS have two drawbacks. The first is that Uncle Sam requires owners of TIPS in a taxable account to pay income taxes on any inflation-adjusted gains before you get any of your inflation-adjusted money at maturity. The easy way to invest in TIPS and avoid the tax problem is to own them in a tax-deferred retirement savings account, such as a 401(k) or IRA. The other issue is that you can't buy TIPS directly from the U.S. Treasury for your retirement savings account. You have to pay a broker to do it for you. The federal government seems to be more worried about lining Wall Street's pockets than making it easy and cheap for savers to own TIPS in their retirement accounts. Shame on Treasury.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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