Where you choose to buy your Treasury Inflation Protected Securities (TIPS) is very important. As I mentioned in the article: Inflation Protection and Taxes, failing to put your TIPS into a tax advantaged account causes them to shed their inflation protection. That’s because taxes are assessed as if inflation doesn’t matter.
You can buy Treasury Inflation Protected Securities directly from the United States Treasury at TreasuryDirect.gov. There are detailed instructions on setting up your TreasuryDirect account in my article: How To Buy an I Bond. TreasuryDirect accounts are not Roth accounts, though. That means that you will not be protected from inflation losses due to taxation.
Finding an Online Brokerage Company
Instead of using TreasuryDirect to buy TIPS, I highly recommend that you open a Roth IRA account at an online brokerage company. I have done a little research for you to make sure that there are some options, but I would not be surprised if there are many more good options. I came up with four and they are almost the same in what they have to offer as far as TIPS go.
- Roth IRA accounts with no minimum balance
- Can hold TIPS in the account
- Flat $25 trading fee for TIPS at auction
- Trading fees are based on yield
- Can buy at auction or on secondary market
- Minimum trade is $1,000
- Roth IRA accounts with no minimum balance
- Can hold TIPS in the account
- No trading fees for TIPS
- Can buy at auction or on secondary market
- Minimum trade is $1,000
- Roth IRA accounts with no minimum balance
- Can hold TIPS in the account
- No trading fees for TIPS
- Can buy at auction or on secondary market
- Minimum trade is $1,000
- Roth IRA accounts with no minimum balance
- Can hold TIPS in the account
- No trading fees for TIPS
- Can buy at auction or on secondary market
- Minimum trade is $1,000
Things to Consider
Where you choose to hold your Roth IRA depends on your own needs and preferences. It may be easiest to open one with a brokerage that you already use for your traditional IRA or 401k. There are other things to compare as well, such as the fees that will be charged should you choose to leave them, so it’s good to do your homework.
Financial Advisors
If you have an advisor you trust, it might be easy to do it all through them. Just tell them that you would like to hold your long term savings in TIPS using a Roth IRA and they should be able to take care of it for you. As you can see, trading in TIPS doesn’t usually cost very much so it shouldn’t cost very much to just have your existing financial advisor do it for you.
If you have an advisor that is unwilling to put you into a Roth IRA or TIPS, I would consider looking for help elsewhere. TIPS are one of the most secure investments available. Remember that advisors are supposed to be working for you and they should be looking out for your best interests.
The Fine Print Takes Time
One of the things that really surprised me was the legal paperwork that an account holder is required to understand and agree to before opening an online account. This creates a time cost that can easily be overlooked. It dwarfs the time it takes to enter your information and set up your account. The fact that it is in small print and put right at the final button before you open the count should probably be illegal in and of itself, but that’s what we have to deal with right now.
When you click on that little tiny link, it exposes you to as much as 100 pages of legal paperwork that you are required to “read and understand.” This part of the process took me about a week of reading after I got home from work.
This really hurts, but because I wanted to be honest before God and I could clearly see that I was likely to save thousands of dollars as a result, I eventually got through it. I didn’t read the documents for all four of these brokerages. I can only speak for Fidelity. I did start on Charles Schwab and TD Ameritrade documents. All of them were pretty difficult. Schwab’s seemed a bit simpler in language but if I recall, it was about 100 pages printed.
When you read the fine print, you may want to have these links on hand to help you understand what you are reading. These documents require that you understand jargon in three difficult professions: Tax, Securities and Legal. Here are some helpful links:
- Investopedia – This helps with trading jargon
- The Free Dictionary – Defining legal terms
- The IRS IRA Info – The tax info
You may even want to “share the pain” with your brokerage representatives. That’s what I did. If I got discouraged, I just called them up and told them that I have been going through their legal documents for a few days and I don’t understand “xyz”.
Funding the Account
There are several ways that you can fund an account. One of the easiest ways would be to roll an existing 401k account into your Roth IRA. Before you do that, talk to your tax advisor. In general I think this is a good idea, but your specific situation is important to consider. Taxes will be required in the year that you do the rollover. It may be beneficial to do a rollover each year for a few years instead. Rollovers don’t have a penalty of 10% when you do them before age 59 and a half, but you do have to make sure to specify it as a “Rollover.” My understanding is that you can only do a certain number of rollovers per year. Again check with your tax advisor.
You can usually fund an account by linking your checking account to your brokerage account. This is similar to what you might do when you pay a bill online.
You can also just send a paper check by mail to your brokerage. They should have a deposit slip that you can get with your account number on it after you set up your account.
The road is quite narrow to protecting your savings from inflation here in the United States. Even though it’s not easy, it’s worth it to get your brokerage Roth IRA account open and ready to make it possible.
I have a spreadsheet that tracks your TIPS and helps you see your inflation protection in action. Learn more here
Copyright © Troy Taft 2018
