TIPS tips

The recent inflation rate is about 3.5% [To know latest numbers, visit U.S Department of labor] . The recent hikes in short term interest rates have made life tougher for borrowers and spenders but those sitting with cash did not get much of an advantage. The CDs and saving account yields (see our posting on best yields) are not yet good enough to win the race against inflation, if you consider the tax on these incomes.

Inflation-indexed securities (TIPS) seems to be the best way to beat both inflation and tax. It pays a fixed interest rate but its adjusts its principal to keep pace with the consumer price index. In recent times, 5-year TIPS have a yield about 2 percentage points above the inflation on a 5-year bond. Even though it's not much, it's safer and it is important if you are a reasonable guy who believes that diversification and not greed can make you a successful investor.

Note: When TIPS increase in value due to inflation adjustment, Uncle Sam considers that to be a reportable income, even though money does not reach your hand before the bonds mature. So, TIPS would give you more profit if you hold it in your retirement account.