Inflation and an IRA
Question: I’m interested in finding a good investment for inflationary times. This would be about 7% of my retirement portfolio; around 10,000 in cash languishing in 2 different IRA accounts. I am 42, and will probably have to work until I croak. I am guessing I’ll retire at 75 or so. I considered purchasing some I Bonds in an IRA account. I’d like to be able to sweep the proceeds of a dividend-yielding investment into the bonds once a year. I contacted my stock-trading account – no dice on holding I Bonds in my account there. I contacted Treasury Direct and they told me I needed to find a bank that would hold the bonds in an IRA and also contact the IRS. Do I need to call all the banks in town to see if anyone will do this? Is there a kind of bank that I should focus on? A directory that would help? Am I trying to do something completely wacko and ill-advised? Jill, Northfield, MN
Answer: I wouldn’t say “wacko”. But ill-advised? Yes. For a number of technical and legal reasons you can’t get I-bonds into an IRA. More importantly, you wouldn’t want to do that anyway. In a sense, an I-bond acts like an IRA. The money you put into an I-bond compounds tax deferred until you cash it in. At that point you owe ordinary income taxes on the gain. With an IRA, your investment grows tax deferred until you pull it out in retirement and pay ordinary incomes taxes on the withdrawal. You’d be wasting the tax shelter if you could invest it in an IRA.
That said, I like I-bonds. I would just buy them directly from the Treasury.
Inflation isn’t much of a problem right now. The government reported this morning that the Consumer Price Index for the 12 months ending in May was down 1.3%, the biggest decline since 1950. I’m not very concerned that the Federal Reserve extraordinary actions to shore up the economy will end in a bout of hyperinflation, either. The formidable combination of an intensely competitive global economy and a competent central bank will keep inflation around its target level of 1% to 2%.
Of course, that forecast could be horribly wrong and a reprise of the inflationary ’70s awaits us. Even if I am right low levels of inflation erode the value of a dollar over time. Long-term savers should worry about inflation a lot. That’s why I like Treasury Inflation Protected Securities or TIPS. It’s an ideal security for an IRA, although you’ll have to buy them from a broker. I’ve written a fair amount about TIPS elsewhere on the Getting Personal site. The best overall source of information for investing in TIPS and similar securities for safety and security is Worry Free Investing by Zvi Bodie, finance professor at Boston University. You can check it out here.
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