How to Invest in TIPS: Treasury Inflation-Protected Securities | Investing

Key Takeaways:

  • Treasury inflation-protected securities (TIPS) offer inflation protection, appealing to investors when rising inflation is a concern.
  • Unlike traditional bonds, TIPS adjust principal and interest payments based on consumer price index changes.
  • TIPS may be advantageous for inflation protection, but they historically underperform stocks in the long run.
  • TIPS are generally seen as a wealth protection tool rather than a wealth-building instrument.

A fixed-income investment designed to outpace inflation sounds appealing.

That’s the idea behind Treasury inflation-protected securities (TIPS), which are Treasury securities with principal and interest payments that are adjusted for inflation.

Many investors are drawn to these bonds in an era of rising inflation. Here’s a look at what TIPS are, and whether they’re a sound investment as inflation remains stubbornly sticky:

Here’s a short rundown of TIPS’ key characteristics.

  • Principal protection. When you buy a TIPS bond, you are guaranteed to receive its full face value at maturity. This means that even if there is deflation, and the consumer price index (CPI) decreases, the principal value of your TIPS bond won’t be reduced.
  • Interest payments. The interest payments on TIPS bonds are adjusted for inflation. The interest rate, also known as the coupon rate, is fixed at issuance, but the interest payments adjust with changes in inflation. As the CPI rises, interest payments increase, giving investors a hedge against inflation.
  • Taxation. Although TIPS bonds protect against inflation, they’re still subject to federal income tax on interest payments and any capital gains. However, investors don’t incur state or local income taxes on interest earned from TIPS.

Unlike traditional bonds, TIPS adjust both principal and interest payments based on changes in the CPI. The idea is that TIPS can help investors maintain purchasing power when prices are

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