TIPS and I-Bonds As Investments Within a Roth IRA? July 5, 2000January 28, 2017 Mark Bell: “Your tangential forays into the world of anything and everything are amusing, albeit unfocused. But could we swing back to a financial question for a moment? Retirement age is coming up faster every day. The jury is still out on whether I’ll pass the means test. So let’s talk money. In the spirit of diversification, how would you rate TIPS and I-Bonds as investments within a Roth IRA? I got the stocks, the bonds, 401K, the rental real estate, etc. but a few ‘secure’ things that pay reasonably well seem attractive. What do you think?” Tangential forays? Whatever could you mean? But just before answering your good question, here, courtesy of Dana Dlott, are the results of a contest for Great New Theories, sponsored by Omni magazine. Omni’s Honorable mention: The quantity of consonants in the English language is conserved. If omitted in one place, they turn up somewhere else. When a Bostonian “pahks” his “cah” the r’s migrate southwest, causing Texans to “warsh” their cars and invest in “erl wells”. 4. Deforestation will cause the days to become shorter. Just as a twirling skater spins faster when she pulls her arms in, chopping down a lot of tall trees will make the Earth spin faster. 3. China is technologically backward because they have no alphabet. Therefore they cannot use acronyms to communicate ideas at a faster rate. 2. Why yawning is contagious: You yawn to equalize the pressure on your eardrums. This pressure change outside your eardrums unbalances other people’s ear pressures, so they must yawn to even it out. 1. If an infinite number of rednecks riding in an infinite number of pickup trucks fire an infinite number of shotgun rounds at an infinite number of highway signs, they will eventually produce all the world’s great literary works, in Braille. Grand Prize: When a cat is dropped, it always lands on its feet. And when toast is dropped, it always lands buttered side down. I propose to strap buttered toast to the back of a cat; the two will hover, spinning inches above the ground. With a giant buttered cat array, a high-speed monorail could easily link New York with Chicago. Now. “In the spirit of diversification, how would I rate TIPS and I-Bonds as investments within a Roth IRA?” Highly. Go with the TIPS. TIPS are U.S. Treasury “inflation-protected securities.” They are completely safe and will grow about 4% faster than inflation. They make great sense inside a Roth IRA. (Outside an IRA, they’re rotten. Not only is the interest taxed each year, as you’d expect, so it the inflation adjustment — even though you don’t receive it until you sell the bonds.) Yes, stocks might well outperform TIPS over the long run (although my own guess is that the next decade will disappoint investors who’ve been spoiled by the amazing 18-year bull run). But stocks already have very favorable tax treatment, so if you own both — stocks and TIPS — why waste the wonderful tax advantages of the Roth IRA on stocks? You should hold stocks outside the Roth IRA. If a stock you own does well, your gain won’t be taxed until you sell; and at a favorable rate when you do. (If you wind up leaving the stock to an heir, under current law the gain will never be subject to capital gains tax.) If a stock you own does poorly, you can sell it and buy a different one, using your loss to lower your current taxes. You can’t do that with a losing stock inside an IRA. I-Bonds are swell, too — and, if you’re looking for inflation-protected Treasury obligations, the only way to go outside of an IRA. But if it’s even possible to buy them for an IRA, I see no advantage to using them instead of TIPS.