TIPS for your IRA or 401(k)
So the title is a double entendre and corny. So what? Seriously though I want to talk about using Treasury Inflation Protected Securities (TIPS) in your retirement portfolio.
As the name implies, TIPS are Treasuries that are adjusted for inflation. They have a base interest rate and then an inflation-adjusted piece that gets adjusted every six months. Because interest payments and the inflation adjustment is paid out in cash every six months, these bonds should be kept inside a tax-deferred account like a Traditional IRA or 401(k). That way, you’re getting the full real (after-inflation) rate of return without having to pay taxes on it.
In a IRA, you can buy the TIPS directly through Treasury Direct. They come in 5, 10, and 20-year maturities. You can also buy them through a index bond fund. If you look at the composition of the fund, you’ll get an idea of what percentage of the fund is in TIPS and what the average maturity is. If you’re investing through a 401(k), you have to go the bond fund route (if your plan even offers one).
What I really love about TIPS is their guaranteed real return. I don’t know of any other instrument (besides Series I savings bonds) that offer that. And in the unlikely event of deflation, the value cannot go below zero. Nice. Just remember to keep your TIPS in your IRA or 401(k).
April 14th, 2007 at 1:12 am
TIPS pay inflation adjusted interests every six months, but the inflation adjustment on the principal is retained, not paid out. In a taxable account, the retained inflation adjustment, although not paid out, is counted as taxable income.
You CANNOT buy TIPS through Treasury Direct (TD) for an IRA. TD only allows taxable accounts. For an IRA, you must use a broker. You can buy TIPS and other Treasurys at auction through Fidelity and Schwab for free.