How to Buy Treasury Inflation Protected Securities

Treasury Inflation Protected Securities help you protect your purchasing power!

Treasury Inflation Protected Securities, TIPS for short, are investment securities that have a rising or falling principal value based on the increases or decreases of the Consumer Price Index (CPI). Treasury Inflation Protected Securities pay interest at a fixed coupon rate every 6 months. However, this coupon rate is a percentage of your principal value, so your income amount will likely be different every 6 months, as the principal value adjusts with the change in the CPI. TIPS can be purchased through a bank or broker, however the least expensive way to purchase TIPS is directly from the government. New Treasury Inflation Protected Securities are issued with maturity dates of 5, 10, and 20 years. If you are looking to protect your money's purchasing power, TIPS may be an investment option you should investigate further. Below are the steps to research futher and purchase.

Instructions

1. To learn more about Treasury Inflation Protected Securities, TIPS, reference the Treasury Direct Website (see resources section at bottom of this article).

   In the lower left hand corner there is a section titled "Learn about Treasury Bills, Notes, Bonds, and TIPS. In this same section you will notice that there is a link to "Purchase Treasury Securities".

2. 

   Simply put, if the CPI is falling, your principal value and semiannual interest payment will be lower. If the CPI is rising, your principal value and and semiannual interest payment will be higher. Think of the CPI as the average price of consumer goods and services purchased by households. Put another way, are the prices of the things average households purchase going up or down? Historically, over the long-term, inflation (rise in prices) on goods and services is normal and expected. However there have been periods historically of deflation or stagflation. It's really easy to recognize long-term inflation, just think of the car you could have purchased with $10,000 in 1980 versus the car you can purchase today with $10,000.

3. Should you find that Treasury Inflation Protected Securities are an investment security that meet your investment goals/objectives, you can purchase them in increments of $100, with a minimum purchase of $100. TIPS can be sold prior to maturity through the secondary market.

4. 

   Treasury Direct will allow you to purchase with a "noncompetitive bid", meaning you accept the investment yield determined at auction. TIPS are sold electronically through Treasury Direct.

5. As always, before you purchase any investment, be certain to do your due diligence and make sure the investment matches your objectives.

Tips & Warnings

• The income earned from TIPS is exempt from state and local taxes.

• The income earned from TIPS is taxed in the year it is received.

• Principal adjustments are taxed in the year they occur even though money is not received in hand - this is referred to as "phantom income".

• Your principal value on TIPS will fluctate both up and down over the life of the security based on changes in the CPI. As a result, your semiannual interest payments will also fluctuate. At maturity you will be paid back your original principal or the inflation adjusted principal amount - whichever is greater.

Resources

• Treasury Direct Website for Research & Purchase