How TIPS work
TIPS are marketable Treasury securities with one twist: the principal moves with prices. Treasury adjusts it using the non-seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U). When Inflation lifts prices, the principal rises; during Deflation, it falls.
The interest rate, or coupon, is fixed at auction and is never less than 0.125%. You receive half of it every six months, applied to the principal as adjusted on the payment date, so a 3% rise in principal makes each payment 3% larger too.
The adjustment runs through an index ratio: the reference CPI on a given day divided by the reference CPI on the security’s dated date. The reference CPI for the first day of a month is the CPI-U from three months earlier, with days in between interpolated, so the principal adjusts daily but reflects prices from about three months earlier.
An index ratio of 1.05 means $1,000 of original principal has grown to $1,050, and the coupon is paid on the $1,050. TIPS are issued only in electronic form, with a $100 minimum and $100 steps.
TIPS vs. regular Treasuries: real yield and breakeven inflation
A TIPS yield is a real yield: the return you lock in above whatever inflation turns out to be, if you hold to maturity. An ordinary Treasury yield is nominal. The gap between the two at the same maturity is the breakeven inflation rate, the average inflation at which both earn the same.
On September 18, 2026, Treasury’s daily curves showed a 10-year nominal yield of 5.01% and a 10-year real yield of 2.68%, a breakeven of about 2.33%. If inflation averages more than that over the decade, a 10-year TIPS bought that day beats a regular Treasury note; if it averages less, the nominal note wins. The bet is not whether prices rise, but whether they rise faster than the market already expects.
Real yields change daily and can turn negative. Treasury’s auction rules accept negative real-yield bids; when an auction clears below 0.125%, the coupon is set at 0.125% and buyers pay more than face value. To compare a TIPS yield fairly with a CD or savings rate, subtract expected inflation from that rate first, turning it into a real rate of return.
How TIPS are taxed: the phantom income problem
TIPS interest is subject to federal income tax and exempt from state and local income tax. The catch is the principal. Under IRS rules for inflation-indexed debt, each year’s increase in the adjusted principal is taxable as original issue discount, reported on Form 1099-OID, even though you will not receive that money until the security matures or you sell it. A decrease in principal can reduce the income you report.
Investors call this phantom income. In a high-inflation year, the tax on the principal increase can take most of the cash interest you actually received, as the example below shows.
That is why many investors hold individual TIPS inside a traditional IRA, a Roth IRA or a workplace plan, where the yearly adjustments are not taxed as they accrue. Choosing which account holds which asset is asset location. TIPS still work in a taxable account, but you need other cash to pay the tax on the growing principal, and your after-tax real return shrinks as your bracket rises. The state and local exemption helps most in high-tax states.
Buying TIPS, selling early and TIPS funds
You can buy TIPS at auction through TreasuryDirect, bidding noncompetitively for up to $10 million per auction, or through a bank or broker at auction or on the secondary market. TIPS mutual funds and ETFs hold many issues at once.
The protection is cleanest when you hold an individual TIPS to maturity. Before then, its market price moves with real yields: if real yields rise after you buy, the price falls, and selling locks in a loss even though inflation has been added to your principal. TreasuryDirect cannot sell for you. A new purchase must stay there 45 days before you can transfer it to a bank, broker or dealer to sell.
The deflation floor is narrower than it sounds. It guarantees the original principal, not your purchase price. A TIPS bought on the secondary market with an index ratio of 1.20 could lose about a sixth of its adjusted principal to deflation before the floor applied. Most funds never mature, so neither the floor nor a known real return at a set date carries over to them.
How TIPS fit a retirement plan
TIPS are direct obligations of the U.S. government that keep pace with CPI-U, which makes them a strong fit for spending you can predict in real terms: the gap years before Social Security starts, or a floor of essential expenses.
A TIPS ladder buys issues that mature in successive years, so each year’s maturing principal and interest pays that year’s spending. Like any bond ladder, it avoids selling into a falling market, which reduces sequence-of-returns risk for the years it covers. It does not protect you from outliving the ladder; lifetime income such as Social Security or an Annuity does that.
Before leaning on TIPS, weigh the trade-offs.
- CPI-U is an average basket, so your own inflation, heavy in healthcare or housing, can run higher or lower.
- TIPS give up the long-run growth of stocks, so most plans use them for part of the bond side of an asset allocation, not all of it.
- For smaller sums with no price risk at all, I bonds may fit better, within their $10,000 yearly purchase limit per person.
Illustrative numbers
Phantom income on a $10,000 10-year TIPS in a taxable account
- Original principal
- The par amount you bought, in $100 steps
- Index ratio
- Reference CPI on the payment date ÷ reference CPI on the security’s dated date
- Coupon rate
- The fixed annual rate set at auction, never below 0.125%
The reference CPI for the first day of a month is the non-seasonally adjusted CPI-U from three months earlier.
Par amount bought at the July 2026 auction (price assumed at par)$10,000 at a 2.375% coupon
Assumed CPI-U rise over the first year3%, so the index ratio reaches 1.03
Interest paid at index ratios of 1.015 and 1.03$120.53 + $122.31 = $242.84
Increase in principal, paid only at maturity or sale$300
Federal taxable income for the year$542.84
Federal tax at a 24% marginal rate$130.28, with no state tax
You collect $242.84 in cash but owe $130.28 of federal tax, leaving $112.56. The $300 added to principal only keeps pace with prices, yet it is taxed now. At a higher marginal tax rate or in a higher-inflation year, the gap grows, which is why TIPS often sit in retirement accounts.
At a glance
Ways to own TIPS and what each means if you need the money early
| Route | How you buy | Getting money before maturity | Main trade-off |
|---|---|---|---|
| TreasuryDirect | At auction only; $100 minimum; up to $10 million noncompetitive | Hold 45 days, then transfer to a bank or broker to sell | No fees, but slower to sell |
| Brokerage account | At auction or on the secondary market | Sell on any trading day at the market price | Price falls if real yields rise |
| TIPS mutual fund or ETF | Buy shares on any trading day | Sell shares at the current price | Usually no maturity date or par floor; ongoing fees |
| IRA or workplace plan | Individual TIPS in a brokerage IRA; usually a fund in a 401(k) | The account’s withdrawal rules apply | Yearly inflation adjustments are not taxed as they accrue |
Put it in your plan
TIPS in MoneyWhatIf
MoneyWhatIf models bonds as an allocation within an investment account, not as individual bonds with maturity dates, so a TIPS holding is represented through that account’s bond share. Choose the Treasury bond type, and in a taxable account the model taxes that share’s interest federally but not at the state level. Every bond type earns the plan’s bond return assumption, so enter a return that suits TIPS, and switch the charts to today’s money to judge results in purchasing power rather than future dollars.
Common questions
TIPS FAQs
Can you lose money on TIPS?
Yes, in two ways. If you sell before maturity after real yields have risen, the market price can be below what you paid. And the deflation floor protects only the original principal, so a TIPS bought above par or with inflation already added can return less than its purchase price. Held to maturity from an at-par auction purchase, you get back at least your original principal plus the interest paid along the way.
Are TIPS better than I bonds?
They solve different problems. I bonds have no market price risk and let you defer federal tax, but purchases are capped at $10,000 a year per person and you cannot cash them in the first 12 months. TIPS have no practical purchase limit and had a 2.68% 10-year real yield on September 18, 2026, well above the 0.90% fixed rate on I bonds issued from May to October 2026, but their price moves and their inflation gains are taxed yearly.
Do TIPS pay interest monthly?
No. TIPS pay interest every six months at the fixed coupon rate. The principal, however, is adjusted daily through the index ratio, so each semiannual payment is based on the principal as adjusted on that payment date. The inflation increase itself is not paid out until the security matures or you sell it.
When are TIPS auctioned?
Treasury sells new 5-year TIPS in April and October, new 10-year TIPS in January and July, and new 30-year TIPS in February. Reopenings, extra sales of an existing issue, follow in June and December for the 5-year, in March, May, September and November for the 10-year, and in August for the 30-year. The July 2026 10-year auction set a 2.375% coupon. Treasury’s auction calendar lists exact dates.