To invest in TIPS (Treasury Inflation-Protected Securities), you have three practical paths: buy them directly from the federal government at auction through TreasuryDirect.gov, buy previously issued TIPS on the secondary market through a brokerage account, or hold them indirectly through a TIPS-focused ETF or mutual fund. The direct minimum is $100, and opening a TreasuryDirect account requires a Social Security Number, a U.S. address, and a linked bank account.1TreasuryDirect. TIPS — Treasury Inflation-Protected Securities Each route trades off cost, flexibility, and tax complexity, and the right choice usually depends on whether you plan to hold to maturity and whether the account is taxable.
What You’re Actually Buying
TIPS are federal bonds whose principal adjusts with the Consumer Price Index for All Urban Consumers. When inflation rises, the principal rises; a fixed coupon rate is then applied to that adjusted principal, so your semiannual interest payments grow with inflation.1TreasuryDirect. TIPS — Treasury Inflation-Protected Securities A $1,000 TIPS with a 2% coupon pays $10 every six months at par, but if inflation pushes the principal to $1,050, the next payment is calculated on that higher amount.
Deflation works in reverse: principal shrinks, interest payments shrink with it. There’s a floor, though. At maturity you receive the greater of the inflation-adjusted principal or the original face value, so you never get back less than you put in.1TreasuryDirect. TIPS — Treasury Inflation-Protected Securities
Buying TIPS Directly at Auction
Direct purchases go through TreasuryDirect. To open an account you need a Taxpayer Identification Number (a Social Security Number for individuals), a U.S. address of record, and a checking or savings account with routing and account numbers. There’s no minimum balance to open the account. After you enter your personal and bank details on TreasuryDirect.gov, the system emails a unique account number you’ll use for every future login, so save it somewhere you can find later.2TreasuryDirect. Open an Account
TIPS are only sold on scheduled Treasury auction dates, not on demand. Three maturities are currently offered: 5-year, 10-year, and 30-year, each auctioned several times a year on a rotating schedule, with the 10-year auctioned most often.3Treasury.gov. Tentative Auction Schedule of U.S. Treasury Securities Check the auction calendar before you plan a purchase; new TIPS don’t come up every week the way Treasury bills do.
To place an order, log into TreasuryDirect, open the BuyDirect tab, select TIPS, pick your maturity, and enter your amount.4TreasuryDirect. Buying a Treasury Marketable Security The minimum is $100, with purchases in $100 increments up to $10 million per auction through a non-competitive bid.1TreasuryDirect. TIPS — Treasury Inflation-Protected Securities Almost every individual investor uses non-competitive bidding, which means accepting whatever yield the auction produces in exchange for a guarantee that your full order gets filled at the market-set rate. Treasury debits your linked bank account on the security’s issue date, so make sure funds are available then. There’s no grace period.
Buying TIPS Through a Brokerage
Previously issued TIPS trade between investors on the secondary market, accessible through most full-service and discount brokerages. This route lets you pick up bonds with specific remaining durations that current auctions don’t cover. If you want a TIPS maturing in three years and the next auction is a fresh 10-year, the secondary market is your only option.
Prices there move with interest rates, inflation expectations, and supply and demand, so a bond may trade above its adjusted principal (at a premium) or below it (at a discount). You’ll also see bid-ask spreads, the gap between what buyers offer and sellers want, which acts as an implicit transaction cost. For most retail-sized orders it’s modest, but worth checking before you place an order. Your brokerage’s fixed-income desk or bond platform will list available TIPS by maturity, coupon rate, and current price.
Buying a TIPS ETF or Mutual Fund
If tracking auction dates and managing individual bonds sounds like more work than you want, TIPS-focused ETFs and mutual funds package the same inflation-linked exposure into fund shares you buy and sell through any brokerage account during normal trading hours. The manager handles purchases, reinvestment, and rolling maturing bonds into new ones.
The main trade-off is cost. TIPS funds charge an annual expense ratio, typically somewhere between 0.03% and 0.20% of your investment, that you’d never pay holding individual bonds through TreasuryDirect. On a $50,000 position, even a 0.10% expense ratio quietly costs $50 a year. In exchange, funds offer liquidity individual bonds don’t: you can sell shares on any trading day at the current market price.
Funds also behave differently from individual TIPS when rates move. When interest rates drop, the market value of existing TIPS rises and fund share prices follow. When rates rise, share prices fall, and unlike an individual bond held to maturity, there is no guaranteed return of your original principal. Investors with a specific time horizon who want that certainty are usually better served by individual bonds.
Selling TIPS Before Maturity
One thing to know before you buy through TreasuryDirect: the platform does not run a secondary market. If you want out before the bond matures, you have to transfer the bond to a commercial brokerage first and sell it there. That transfer uses Form PD F 5511, requires your brokerage’s book-entry delivery instructions, and must be signed in person before an authorized certifying officer at a bank, trust company, or credit union. A notary public’s signature is not accepted. The completed form goes to the Bureau of the Fiscal Service in Parkersburg, West Virginia, and the process often takes several weeks. If there’s any real chance you’ll want to sell early, buying through a brokerage from the start is easier.
Taxes You Should Know Before You Buy
TIPS interest and inflation adjustments are exempt from state and local income tax under federal law.5Office of the Law Revision Counsel. United States Code Title 31 – 3124 Exemption From Taxation Federal tax applies to both, and the mechanics catch many first-time buyers off guard.
Phantom Income
Each year inflation raises your TIPS principal, the IRS treats that increase as taxable income, even though you won’t actually receive that money until the bond matures or you sell it. This is phantom income, reported on Form 1099-OID under the original issue discount rules. On a $10,000 TIPS during a year of 4% inflation, roughly $400 of additional taxable income is reported before you’ve collected any principal back. The OID is calculated as the difference between the inflation-adjusted principal at the end of the tax year and its value at the beginning, and it’s reported alongside your regular semiannual interest.6Internal Revenue Service. Publication 1212 – Guide to Original Issue Discount (OID) Instruments If you bought on the secondary market rather than at original issue, you may need to recalculate the figure on your 1099-OID to reflect your actual cost.
Using a Tax-Advantaged Account
The simplest way around the phantom income problem is to hold TIPS inside a traditional IRA, Roth IRA, or 401(k). In a tax-deferred account you don’t owe annual tax on inflation adjustments, because gains are taxed at withdrawal or, in a Roth, not at all. For a small position or a low tax bracket, phantom income may not justify restructuring your accounts. For larger holdings, the annual tax drag inside a taxable brokerage account adds up over a multi-year bond term, and most planners recommend the tax-advantaged route for individual TIPS of any real size.