Treasury-Inflation Protected Securities – is now a good time to consider them as part of your portfolio? Here are the top 5 questions I’ll be answering today about I-Bond vs TIPS:
1. Why TIPS (Treasury-Inflation-Protected Securities) might be a better investment than I-Bonds for some folks right now
2. What is real yield to maturity?
3. What is nominal yield to maturity?
4. Why (for others) I-Bonds may still be the inflation-protection winner
5. How to figure out whether I-Bonds or TIPS might work better for you
TITLE: TIPS vs I Bonds: What’s Better In 2023 | Treasury-Inflation-Protected Securities (TIPS 2023)
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WATCH NEXT
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As an investor, it is essential to be well-informed about different financial instruments to make smart investment choices. Two of the most popular instruments that investors usually consider are Treasury-Inflation-Protected Securities (TIPS) and I Bonds. Both of these investment vehicles offer inflation protection, which is crucial considering the rising cost of living in today’s world. In this article, we will discuss the pros and cons of each and help you determine which is better for 2023.
What are TIPS?
TIPS are a type of fixed-income security offered by the US government. They are similar to traditional bonds, but with a significant difference: their interest rates are adjusted to keep up with inflation. TIPS are designed to provide investors with a real (inflation-adjusted) return on their investments. When inflation rises, the principal (or face value) of the TIPS increases, and when inflation falls, the principal goes down.
What are I Bonds?
I Bonds are also issued by the US government and are inflation-protected securities designed to protect investors from inflation. The interest rate on I Bonds is a combination of a fixed and a variable rate. The fixed rate stays the same throughout the bond’s life, while the variable rate changes twice a year based on the Consumer Price Index (CPI).
TIPS vs I Bonds
While both investments are designed to protect against inflation, they work differently. TIPS are fixed-income securities, while I Bonds are a type of savings bond. TIPS are traded on the secondary market and can be bought and sold like traditional bonds. In contrast, I Bonds can only be bought directly from the Treasury Department, and there are buying limits.
Pros and Cons of TIPS
Pros:
1. Inflation protection: TIPS are explicitly designed to protect against inflation, making them an ideal investment for those who want to safeguard against rising prices.
2. Liquidity: TIPS are traded on the secondary market, making them a relatively liquid investment.
3. Tax benefits: The interest earned on TIPS is subject to both federal and state taxes. However, investors do not have to pay taxes on the inflation adjustment until the bond matures or is sold.
Cons:
1. Lower returns: TIPS usually have lower yields than traditional bonds, making them less attractive to some investors.
2. Higher risk: Like any investment, TIPS carry some risk, and while they are considered low-risk, they are not risk-free.
Pros and Cons of I Bonds
Pros:
1. Inflation protection: Like TIPS, I Bonds are designed to protect against inflation, and the inflation adjustment is tax-free.
2. Tax benefits: The interest earned on I Bonds is exempt from state and local taxes.
3. Backed by the government: I Bonds are considered one of the safest investments, as they are backed by the US government.
Cons:
1. Limits on purchases: Investors are limited to buying $10,000 worth of I Bonds per year, which can be a disadvantage for those who want to invest more.
2. Lock-in period: I Bonds must be held for a minimum of one year before they can be redeemed.
Which One is Better for 2023?
The answer to this question depends on your investment goals and risk tolerance. TIPS are better for investors wanting a more liquid investment that is tradable on the secondary market. In contrast, I Bonds may appeal to those who want a more conservative investment that is guaranteed by the US government. Both investments will provide inflation protection, but TIPS may offer slightly higher returns for those willing to take on more risks.
Conclusion
TIPS and I Bonds are both excellent investment options for investors looking to protect against inflation. If you are comfortable with less liquidity and want a more secure investment with government backing, I Bonds may be the better choice. For those looking for more liquidity and higher returns, TIPS may be a better option. Ultimately, it is crucial to research and consult with a financial advisor to determine which investment is right for you.
Thanks for visiting our personal finance channel! We hope this free content will help fast-track your financial journey! Everyone's financial journey is different. Please note that there are questions/ comments which I will not be able to answer without fully understanding your financial, personal & other circumstances.
WATCH NEXT
⭐ What Are TIPS | How To Buy TIPS: https://youtu.be/ajwb0buoNzE
⭐ I-Bond Interest Formula: https://youtu.be/9hfHoSijJEk
⭐ Best CD 2023 | Earn 5% APY (How To Buy): https://youtu.be/Gd_CQ9QNCDE
⭐ Brokered CDs vs T-Bills: https://youtu.be/zhEiyW2N7KE
WRT my 1099 for TIPS, there's an entry(Box 12) for bond premium on treasury obligations; what are its tax ramifications: annual interest, accumulated interest at maturity, or something else? Why is it different from Box 3 interest for TIPS?
Thank you
Great analysis. When you post more videos about TIPS, I'd appreciate some info on the strategic differences, advantages, and disadvantages of buying individual TIPS vs. a TIPS fund or ETF.
What does your crystal ball say about the May I-bond rate?
Hi Jennifer
Can 4 or 8 week T Bills be bought on the secondary market on Schwab online?
I can only find 3 month or longer.
Wonderful explanations! Very helpful! Thank you!
i wish u were my wife <3
I have been building several different ladders. It has occurred to me that letting my money sit in a low interest bank account waiting for auctions to come up is not very smart. Since I am still in the building stage I buy T-Bills weekly and Notes monthly. I now use the 4 week T-Bills to 'park' money in my account. Each month it matures and I replace it. It is my spending money for treasuries. I time the term to mature just before I need to pay for a treasury item. The money goes into my checking account then when it executes an order it withdraws from the same account. I am considering using a 4 week T-Bill as a savings account. I can put a large amount of money in it and it matures every 30 days and I place another order for the same 4 week T-Bill. If I need the money I only have to wait at most 30 days to access my cash. I can use credit cards until they mature. Do you see any problem with this idea? My savings account pays 2.7% interest. The 4 week T-Bill pay in excess of 4%. By the way keep up the good work.
How would bonds be in a situation where banks are found to be wanting in funds, a bank run and our dollar is found to not be adequately backed by value. The dollar is being devalued and will be some to fix this problem. it will not collapse though it may create some fear. Will bonds be safe if we take a new digital dollar and if the new dollar is a little less in value than what we have now will bonds be safe? Will we get the difference in loss or will we lost that value too, I"m think it will be around 10% loss when we get the new dollar, hopefully less. I am not concerned of a collapse, I do think it will be taken care of but i have been adding funds to I- Bonds, or is a different instrument on the government website better. i already have some mining stock and silver and gold but also other unrelated companies like TSLA..
If memory serves, the regular non-inflation protected securities offered by the Treasury tend to adjust in auction in a way that accounts for current inflation. Similarly the preferential tax treatment of munis end up equaling with other options as investors expect that difference to be covered. The bond market tends to be most efficient since the math is transparent….at least when duration risk is not factor.
Great video. You answered all my questions about I Bonds vs TIPS. Specifically, your chart on age groups was really helpful. Thanks so much for doing these videos!!!
I would be curious if you are looking at the upcoming auction in April for the 5 year TIPS on Treasury Direct and if you might make a video about it?
I like knowing how much I'll be making in interest over a period of time, so it is IBonds for me. I have enough fluctuation in other areas of my portfolio.
Can you share you strategy on S&P500?
Exceptional! TY
Jennifer, thanks for your analysis. I Bonds are in my taxable account and I have some TIPS funds in my tax-deferred accounts. More recently, I've been discouraged by ETFs and Mutual Funds with TIPS and making some selected individual TIPS purchases in my tax-deferred accounts. Have you done a video on buying TIPS vs. an ETF like VTIP? What do we do when VTIP is down so much! Can't hold an ETF to maturity, since it is a collection of bonds bought by others!
The best thing I like to do recently is refreshing your channel to see if any new video comes! You make all this complicated knowledge so easy to understand even for someone like me who has no financial background and speaks another language. Love your channel!
Hi,
I have bought I bonds in year 2022, I have confusion with intrest earned, that I have to show in my 2022 it return, or I have to show , when I withraw the amount ?
Please guide me.
Thank you very much.
I’m a bit confused as to how TIPS at 1.4% are a better hedge against inflation than I-bonds. I bought a number of I- bonds in the early 2000’s . Some of those bonds were paying over 12% in the past year. I’m curious how I would have made out if the same principal amount was invested in TIPS back then.
One important difference between iBonds and TIPS that you did not mention is that iBonds use that 6 month look-back on inflation rates. That is why so many of us rushed to buy in that window with a few high readings. At this moment we are in the opposite situation with a few very low readings. I won't be buying iBonds that capture that window – instead I plan to sell my zero fixed rate iBonds unless that window significantly improves (as your other video correctly pointed out is possible) and use the proceeds for other investments including TIPS if the real yield stays high, or even new iBonds with a fixed base rate.
Thanks for the amazing content!
Great video as usual. Seeing that TIPS come in maturities of 5, 10, and 30 years, would a TIPS fund be a good (better?) vehicle than individual TIPS for a gray-haired person in Group 2? Thanks
Soooo…….I’m with you….short term T bills….waiting for the long end to get above 5%….then lock in 1 & 2 & 5/year bills/ notes
Thanks for reassuring me on tips. Although I only have them in a Roth IRA would like to learn more about how to report phantom income if I buy some in a taxable account. Wary of most other bonds I am thinking laddering tips is good for me, better than other bonds (while real yield is high). The disadvantage of I bonds is that after paying taxes you won't come out ahead of inflation when the fixed rare is low.
Looking forward to see a video about I bond vs T bills for 2023❤
My goodness, you are good at this! I'm 67 so it's an easy choice for me. I should get a big tax return so I have already directed my CPA to spend 10,000 of it on I-Bonds. It's a great choice for me, and I understand it (mostly) because of you. Many thanks!
Thanks for your videos. Very grateful. Quick question in re: 14:32 of the video. I bought my I-bond in November. When do you start seeing the interest getting credited in the current value field? My "current value" is the same as the purchase price. Am I missing something?
Perhaps your best video yet. Complicated topic explained very well. The spread on your TIP is why I only buy bonds that I'll hold to maturity.
What would you recommend for someone in their 30s who isn't retiring soon, but trying to save for a down payment?
Another great video, thanks for sharing the Pro and Con on IBond vs TIP.
Yes please, more TIPS videos