TIPS IRA Investing: Does It Belong in Your Retirement?

The process of IRA investing requires that you diversify your funds over a number of different investments. One such investment that you may want to consider is TIPS. Here are the basics of TIPS and why you may want to include them in your IRA.

What is TIPS?

The term TIPS stands for Treasury Inflation Protected Securities. They are offered by the United States Treasury and are bonds that are available for purchase. This type of investment is designed to protect investors against inflation. You purchase a bond at a specific face value. The bond pays a certain percentage of interest twice a year. The interest rate that it pays goes up with inflation and down with deflation.

The inflation, or deflation, is measured by the Consumer Price Index. Therefore, if the Consumer Price Index says that inflation was 2% during the 6-month period, the Treasure Inflation Protected Security is going to add another 2% to the interest rate that it is paying you. In this way, the money that you invest in the security is guaranteed to be protected against inflation. At the maturity of the investment, you will be paid the adjusted amount or you will be paid back your original investment. The greater of the two amounts is what you will receive. 


This represents one of the safest investments around. One of the problems with regular savings bonds is the low interest rate that they pay. Many worry whether or not they will be able to keep up with inflation by purchasing traditional savings bonds. Therefore, with this savings bond, you can effectively eliminate this worry. You know that you will keep up with inflation. 


Purchasing this type of investment is a relatively simple process. You can buy them directly from the United States Treasury website. You can quickly open an account with them online and then use a non-competitive bid system to bid on them. 


While this is an interesting investment, that does not necessarily mean that you should include it as part of your IRA. This may be something to consider as a part of your portfolio, but it should not make up the majority of the investments. With an IRA, you want to diversify your portfolio over a number of different investments. You also want to try and beat inflation with the interest that you receive from your investments. This type of security is designed to stay right at the inflation level.

With stocks, mutual funds, and other types of investments, there is no reason that you could not beat the rate that you are getting from this security. However, this is one of the safest investments that you could possibly make. Therefore, it is a good idea to use some of these securities as part of your portfolio. This will basically guarantee that you still have part of your IRA money even if the rest of your investments go badly.

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