Ask Money

TIPS

Chris Farrell Oct 24, 2008

Question: On a recent show, you suggested that investors should hold a significant amount of TIPS in their IRAs. I think this is a reasonable idea so I started looking into doing this. I believe that the best way to purchase and own TIPS is to own the bonds directly, since then you are locking in the maturity date. The best way I found to buy TIPS in this way is through TreasuryDirect. However, I could find no way to be able to purchase through TreasuryDirect from an IRA. So my question is: Is there a way to buy TIPS from an IRA using TreasuryDirect? Robert, Shoreview, MN.

The alternatives are

1)Buying TIPS on the secondary market from a brokerage account in an IRA. This is inferior for three reasons : you pay a commission, you will get hit with a heavy spread, it is difficult to calculate the actual “base” interest rate you will be getting.

2) Buying a TIPS mutual fund in your IRA. This is inferior because TIPS funds actually act much like bond funds, and fluctuate based on current interest rates. Also, there’s the added complexity that they also will fluctuate based on inflation expectations. And there is no fixed maturity.

Answer: You’re absolutely right, and it’s a disgrace. I know a number of finance academics like Zvi Bodie of Boston University have lobbied for the Treasury to let individuals buy from Treasury Direct in their IRAs. But it looks like Treasury is more concerned about Wall Street commissions than the retirement security of the individual saver. The same goes for their decision to limit the amount of tax sheltered I-bonds that an individual could buy in any one year. (The limit is $5,000 electronically and $5,000 in paper bonds.)

I still like TIPS. I prefer buying on the secondary market because then you know what you have and when it will mature. But a lot of people are uncomfortable with that. In that case, I would go the mutual fund route.

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