Look into Hot TIPS

Physician's Money Digest, May 31 2004, Volume 11, Issue 10

With inflation fears on the rise again,investors are taking a closer look at USTreasury Inflation-Protected Securities(TIPS). TIPS move in step with inflationby adjusting the bond principal upwardin line with the inflation rate. But TIPShave drawbacks as well, which has ledsome financial advisors to recommendtheir cousins, Series I savings bonds,which carry an interest rate that ratchetsup with inflation. Like all US savingsbonds, I bonds accumulate interest tax-freeuntil you cash them. TIPS, on theother hand, pay you phantom interestthat you must pay tax on each year if youhold them in a taxable account. TIPS canalso decline in value if interest rates spike,which doesn't happen with I bonds. Youcan also cash in your I bonds easily. WithTIPS, unless you're in a TIPS mutualfund, you must sell through a broker andpay commissions. For more informationon these debt investment instruments,visit www.publicdebt.treas.gov.