TIPS vs IBonds

[KB]

I have read about the benefits of each of these, but not seen a comparison. For someone who is not yet ER, has a 401K and Roth Ira and still wants to invest for income and safety, which woud be best?

Thanks

 

[Whakamole]

I-Bonds are naturally tax-deferred. Thus they are good for your taxable accounts

TIPS pay interest, so they are better for tax-free/tax-deferred retirement accounts.

 

[KB]

Thanks, I'll look more closely at I Bonds.

 

[Roger_R]

TIPS also have a specific maturity. The real rate of return above the rate of inflation adjustment is higher for TIPS maturing out in the 10 and 20 year range.

 

[wabmester]

I-bonds are essentially 5-year TIPS with some side-benefits.  Those benefits are tax deferral (not a huge benefit), tax-free if you use them for education, you can cash them out after 1-year with penalty, and you can keep them for up to 30 years.   And in periods of deflation they pay 0% real rather than going negative as TIPS can.

TIPS are better for longer-term investments (>= 10 years) for the simple reason that they have a higher yield with longer-term offerings.   I-bonds and 5-year TIPS yield about 1%, 10-year TIPS yield about 2%, and 20-year+ TIPS yield about 2.5% above inflation. TIPS also trade on the secondary market, so there's a possibility of making capital gains (and losses) that doesn't exist for i-bonds.

 

[Roger_R]

If I recall my reading, TIPS are probably more suited to a tax defered account. Being that you not only pay taxes on the "real" rate of return, but also the inflationary increase on a periodic/yearly basis. I bonds are tax defered until you cash them in, so are better suited for a taxed account. Among all of the other things mentioned.

 

[KB]

What I'm trying to do is increase my taxable holdings that are not my Emergency Fund. IEF is in a MM acct. And I want the taxable account in a safe environment.

I have a 401K that is 60% stocks index fnds and 40% cash/bonds. I also have an IRA that has 60% Wellesley and the 40% is 500 Index, I might move this to Wellington.

I will probably be selling my house in 18 months and investing that money in some sort of bonds. I'l be living on that money until my pensions kick in and then eventually SS.

Does IBonds sound like the right thing for this situation?

 

[wabmester]

Did you mention when you plan to retire? If it's <= 5 years from when you invest, and you plan to cash out your bonds, go with i-bonds. If you don't plan to cash out the bonds in 5-years, and you plan to retire pretty soon, then go with TIPS and don't sweat the taxes. If you don't match either of these cases, do something else entirely.

 

[Roger_R]

Considering your description, you might also want or need to consider the maximum amount a person can invest in I-bonds per year.