Protect Your Retirement Portfolio From Inflation: Buy TIPS

A second drawback for TIPS is that owners are taxed on annual increases in the principal value of a TIPS bond in the years before maturity even though the owner does not realize the benefit until the end of the bond's term. This is known as a tax on "phantom income" and means it is best to own TIPS inside an IRA or another kind of tax-deferred account. That will allow the owner to shield this phantom income from taxation until the funds are withdrawn from the IRA or other tax-deferred account.

TIPS Different from I Bonds

It also should be noted that TIPS differ in several ways from I-series U.S. Savings Bonds, which also adjust for inflation but in a different manner. I Bonds include a fixed earnings rate that remains the same, plus a variable that changes with inflation.

Other differences include the following: I Bonds are non-marketable, meaning they can't be bought or sold through a broker; I Bonds purchases are limited to $5,000 per year per person; and I Bonds interest accrues over the life of the bond and is paid upon redemption, rather than twice a year.

Finally, many individual investors may want to own TIPS through a mutual fund or exchange-traded fund that invests in TIPS. Examples include the Vanguard Inflation-Protected Securities Fund, American Beacon TIPS Fund, Fidelity Inflation-Protected Bond Fund, iShares Barclay TIPS Exchange-Traded Fund and SPDR Barclays Capital TIPS ETF.

A TIPS fund allows the investor to own a wide mix of TIPS of varying maturities and create a more diversified portfolio. Also, a TIPS fund avoids the phantom income tax problem. However, as with any bond fund, the investor in TIPS mutual fund or ETF is not guaranteed a return of principal as they may need to sell the fund at a time when its value is down due to market conditions.

But whether owned directly or through a fund, TIPS can be a sound way to help to stay a step ahead of inflation and a possible return to the 1970s.



  • 1
  • |
  • 2
  • |
  • 3
You Might Also Like...
See It, Share It
The News-Star, Margaret Croft/AP Photo
Hancock County Sheriffs Department/AP Photo
Courtesy Discovery Communications.