A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS are considered an extremely low-risk investment since they are backed by the U.S. government and since their par value rises with inflation, as measured by the Consumer Price Index, while their interest rate remains fixed. Interest on TIPS is paid semiannually. TIPS can be purchased directly from the government through the TreasuryDirect system in $100 increments with a minimum investment of $100 and are available with 5-, 10-, and 20-year maturities. Because a TIPS bond's semiannual inflation adjustments are considered taxable income by the IRS even though investors don’t see that money until they sell the bond or it reaches maturity, some investors pfer to get TIPS through a TIPS mutual fund or only hold them in tax-deferred retirement accounts to avoid tax complications.Purchasing TIPS directly, however, allows investors to avoid the management fees associated with mutual funds. TIPS are also valuable because they are exempt from state and local income taxes.
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