TIPS or I Bond?

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Sunday, December 16, 2007

There are several major differences between TIPS and I Bonds. One thing they share, however, is that you pay federal taxes on them but no state or local income taxes.

TIPS

Are marketable securities, which means you can buy and sell them before maturity at whatever price the market sets.

Pay interest twice a year, which you have to count as income. You also have to report as income any inflation-induced increase in their principal amount.

Sold in increments of $1,000, and an investor can buy up to $5 million worth in a single auction. You can buy either from financial institutions or from TreasuryDirect (See http://www.treasurydirect.gov/indiv/products/products.htm.) Prices are set at auction.

At maturity, you are paid either the original principal or the inflation-adjusted principal, whichever is greater.

I Bonds

Offer more certainty about how much they will return and more control over when you pay taxes on the proceeds.

Don't trade on the market, so you don't have that uncertainty about how much you will get when you cash out.

Interest earned doesn't become taxable income until you cash out, at maturity or before then at a time of your choosing.

Sold in increments of $25 up to an annual ceiling of $30,000 until Jan. 1, when it drops to $5,000. (According to the Treasury Department, 98 percent of all annual purchases of savings bonds by individuals are for $5,000 or less.) You pay the face value of the bond -- that is, $100 for a $100 bond.

Can be cashed in after a year, but you'll pay a penalty of three months' worth of interest payments if you sell before five years. You're paid the principal and any interest that has accrued.


© 2007 The Washington Post Company

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