Many investors are intrigued now by the traditionally boring world of U.S. savings bonds because of the
While a general savings bond just accrues interest at a fixed rate, part of the interest on I bonds, as they are known, is based on a variable rate that keeps up with inflation. Right now, that rate is a pretty generous
But for wealthy investors, especially those close to or in retirement, they're a lot less useful. That's because the Treasury Department says an individual generally can't buy more than
That makes Treasury inflation-protected securities, or
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While the worries are all valid, they don’t mean the approach has suddenly become financial suicide overnight, writes Emily Cadman.
June 1 -
A fever-pitch argument over whether prices and wages will rise after the giant pandemic relief packages has split financial advisors into two camps.
March 19 -
Concern has already seeped into U.S. markets with the cost of goods including lumber and steel rising this year.
June 3
These bonds work a bit differently than I savings bonds. With TIPS, the principal amount of the bond is adjusted periodically to account for inflation and, in turn, so is the interest paid out.
Another selling point is their flexibility: Investors can redeem them at any point. With I bonds, savers must hold onto them for the first year. And if they redeem them within five years of purchase, they are penalized and will earn less interest. With inflation expectations and the economic outlook overall in such flux, it's helpful to have the ability to make changes.
Remember, the point of TIPS is to provide an inflation buffer, not a high
Still, they aren't without risks or drawbacks. The initial investment in TIPS will always be preserved if held to maturity, but the interest payments could be less than you would have received from a regular government bond if there's deflation. Also, if TIPS are sold before maturity to another investor, there's always the danger of losing money because they could be worth less if rates are going up.
They also aren't as advantageous from a tax standpoint as I bonds, which could be particularly onerous for wealthy taxpayers. With TIPS, investors owe tax on the uptick in principal if it's adjusted for inflation each year, even if the bond hasn't been redeemed.
With I bonds, taxes aren't owed until the bond is cashed in. The workaround for TIPS is to hold them in tax-deferred accounts so those "phantom" distributions aren't subject to ordinary income tax rates.
If you want to add TIPS to your portfolio, you have two main options. The cheapest, most direct route is to purchase them directly at Treasurydirect.gov. You can also buy them through a bank or broker. It's often prudent to buy bonds with different maturity dates to stagger the flow of money coming in.
The top 20 performers nearly doubled the gains of their peers over the period.
An alternate option for those who want to be less involved is a low-cost short-term ETF that just tracks an index made up of TIPS. As an example, the Vanguard Short-Term Inflation Protected Securities
Aside from the ease, the other benefit is that funds often distribute the inflation adjustment as income even if you don't redeem your shares — so you have something in your pocket to show for the tax you pay. For taxpayers in top brackets, that goes a long way.
