Where to buy tips

If investors understand what influences TIPS, they may be better informed about the benefits and risks of holding these investments. The primary factors influencing tips are interest rate changes and inflation expectations. TIPS funds are a type of fixed-income investment, and as such, a TIPS fund can be a smart addition to a diversified portfolio, providing a positive inflation-adjusted return for long-term investors.

That being said, investors should be aware that they do not work the same as mutual funds that invest in corporate bonds. As mentioned, TIPS are not guaranteed investments.

Although TIPS are indexed to inflation, they are not guaranteed to increase in value during inflationary periods. TIPS respond more to expectations of investors, as opposed to actual movements of inflation. For example, when actual inflation is higher than expected, TIPS will likely outperform conventional bonds, and if actual inflation is lower than expected, TIPS will likely underperform conventional bonds.

Any interest earned on TIPS is subject to federal income taxes. However, growth on TIPS is exempt from state and local income taxes. TIPS can be a good investment choice when inflation is running high since they offer guaranteed protection where other securities may not.

This is usually a good strategy for short-term investing, while stocks and other bonds offer better long-range returns. Treasury with an account at TreasuryDirect. If you'd prefer to buy them in person, you can get your TIPS through a bank or broker. The Free Dictionary. Department of the Treasury. United States Government Accountability Office.

Accessed Nov. Department of the Treasury, Bureau of the Fiscal Service. You can hold a TIPS until it matures or sell it before it matures.

TIPS can be held until maturity or sold before maturity. Interest income and growth in principal are subject to federal income tax. This helps preserve the purchasing power of your TIPS investment. The value of ordinary bonds, with a fixed par value, is eroded over time by inflation. Note that deflation will reduce the par value of TIPS. You never receive less than the original par value of the TIPS upon maturity. As with most investments, TIPS earnings are subject to taxes, at least on the federal level.

Earnings are generally exempt from state and local taxes. However, you have to be careful with TIPS because their earnings encompass their interest payments and any inflation adjustments that increase their par value. In the event that deflation occurs, reducing the par value of TIPS, you may be able to use it to offset other income gains. You generally will only be able to do this if the adjustment exceeds the amount of TIPS interest you earned that year.

Speak with a tax professional to determine how TIPS may affect your taxes. TIPS can provide an easy way to engineer an inflation hedge in your portfolio. In high-inflation environments, TIPS performance may greatly exceed that of traditional government bonds, whose fixed interest payments effectively become smaller over time. While many investments may outperform inflation over time, TIPS are the only one guaranteed to do this that also have all of the benefits of standard Treasury bonds.

This makes TIPS great low-risk investments. Here are a few of the risks you might encounter if you invest in TIPS.

Treasury at TreasuryDirect. If you choose to buy TIPS on the secondary market, be sure to compare how much the current inflation-adjusted par value differs from the original par value. If its price is above the issue price, you could lose money if deflation drags the par value to less than you paid. Share Now:. Younger investors prefer computers to human advisors.

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