What's better: I bonds or TIPS?October 5, 2012: 6:30 AM ET
What's best for inflation protection: I bonds, TIPS, or a TIPS mutual fund? — Linda Dravin, Westwood, N.J.
All three will help your savings keep pace with rising prices, but the mechanics, from payouts to potential taxes, differ. I bonds, though, offer a distinct tax advantage if you are spending no more than $10,000 (the annual limit per person) and hold them for five years (to avoid an early-redemption penalty).
I bonds accrue interest based partly on the inflation rate, but you don't collect it, or owe taxes, until you redeem a bond. Treasury Inflation-Protected Securities, or TIPS, pay interest, plus adjust their face value for inflation. (Post-inflation returns are currently minuscule for both types of bonds.) You'll owe taxes annually on TIPS' principal gains even though you won't get them until you cash in. TIPS funds pay out those gains. So TIPS and funds are best for tax-deferred accounts.
— Kate Ashford
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