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Ask Money

Inflation indexed bonds

Chris Farrell Oct 30, 2009

Question: Is there a way I can buy “I” series treasury bonds with pre-tax money? I would like to hedge a little bit against inflation with these bonds, but don’t like buying them with after tax dollars. Does this make sense? I am open to suggestions. Jeff, Sparta, TN

Answer: Let me clarify the choices. In an IRA or comparable retirement savings plan you can’t buy Treasury Inflation Protected Securities directly from the U.S. government. However, you can purchase them through a broker with pretax dollars in an IRA, 401(k), and the like. (And commission costs are low.) You can also buy mutual funds that invest in TIPS with pretax money.

The I-bond is a savings bond that also offers investors an inflation hedge. It is purchased with after-tax dollars. But the money compounds tax free until you cash them. You don’t want to buy I-bonds with pretax dollars since it’s already a tax-sheltered form of savings.

Both TIPS and I-bonds are good long-term investments for savers.

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