Understanding TIPS: What Are They and How to Buy Them Through Fidelity and TreasuryDirect

What Are TIPS?

Treasury Inflation-Protected Securities, or TIPS, are a type of U.S. government bond designed to protect investors from inflation. Unlike traditional fixed-rate bonds, the principal value of TIPS is adjusted based on changes in the Consumer Price Index (CPI), which measures inflation. This means that as inflation rises, so does the principal, and consequently, the interest payments, or “coupon payments,” you receive. Here’s a breakdown of key features of TIPS:

1. Inflation Protection: TIPS adjust their value according to the inflation rate, ensuring your investment climate keeps pace with rising prices.

2. Guaranteed Return: They are issued by the U.S. Treasury, which means they come with a guarantee from the federal government, making them considered one of the safest investments.

3. Interest Payments: TIPS pay interest every six months, and the interest payment is applied to the adjusted principal. Therefore, as inflation increases, the dollar amount of those interest payments also increases.

4. Tax Considerations: While TIPS are exempt from state and local taxes, the interest income is subject to federal income tax. Additionally, the increase in principal due to inflation adjustments is considered taxable income in the year it’s realized, even though you don’t receive that adjusted amount until maturity or sale.

Why Invest in TIPS?

Investors often consider TIPS during inflationary periods or as a strategy to preserve purchasing power over time. They can serve as a hedge against market volatility and economic downturns. While TIPS do generally offer lower yields than nominal bonds, their inflation protection feature can make them a compelling addition to a diversified investment portfolio.

How to Buy TIPS

Investing in TIPS can be done through two main avenues: directly from the U.S. Treasury via TreasuryDirect or through various brokers, including Fidelity. Below is a guide on how to purchase them using both platforms.

Buying TIPS through TreasuryDirect

1. Create an Account: Visit the TreasuryDirect website, and create an account. You will need to provide personal information and link a bank account for fund transfers.

2. Select TIPS: Log into your TreasuryDirect account, navigate to the “Buy Direct” tab, and select “Treasury Inflation-Protected Securities.” TIPS are usually available in auction settings.

3. Choose the Auction: TIPS are sold in regular auctions held each month. Review the auction schedule on the site and choose the auction you want to participate in.

4. Place Your Order: You can place either a non-competitive bid (you accept whatever yield is determined after the auction) or a competitive bid (you specify the yield you’re willing to accept, but there’s a risk that your bid may not be filled).

5. Finalize Purchase: After placing your order, confirm that all details are correct. Once the auction concludes, your TIPS will be purchased, and you’ll receive a confirmation.

Buying TIPS through Fidelity

1. Open a Fidelity Account: If you don’t already have a Fidelity account, you’ll need to set one up. Ensure it’s funded appropriately before attempting to make any purchases.

2. Go to Fixed Income Section: Login to your Fidelity account and navigate to the “Fixed Income” section on the homepage.

3. Search for TIPS: You can search for TIPS using the ticker symbol or by navigating through the TIPS category. Fidelity provides access to various TIPS available in the secondary market or upcoming auctions.

4. Assess Available Options: Review the information for different TIPS, including their current yields, maturities, and coupon rates. Fidelity allows you to compare different bonds to find a suitable investment.

5. Place Your Order: Once you’ve selected the TIPS you wish to invest in, you can place your order by specifying the amount you want to buy. Follow the on-screen prompts to finalize your purchase.

6. Monitor Your Investment: After purchasing, you can monitor the performance of your TIPS through your Fidelity account dashboard, managing your investment according to your overall financial strategy.

Conclusion

Investing in TIPS can provide a reliable means of protecting your purchasing power in an inflationary environment while offering the security of backing from the U.S. government. Whether you choose to invest directly through TreasuryDirect or via Fidelity, understanding how to buy TIPS and their unique features can help you make informed decisions that align with your financial goals. Always consider consulting with a financial advisor to determine the best investment strategy for your situation.

LEARN MORE ABOUT: Treasury Inflation Protected Securities

REVEALED: Best Investment During Inflation

HOW TO INVEST IN GOLD: Gold IRA Investing

HOW TO INVEST IN SILVER: Silver IRA Investing