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I was wondering what the pros and cons are of choosing one versus the other. There are TIPS that seem to have a better yield than CDs and would therefore make for better places to park savings.

  • Have you considered the tax implications of each security? TIPS' principal adjustments can cause some additional taxes though you don't see the money until the TIPS matures. – JB King Aug 5 '13 at 20:51
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I think the best answer will depend on your needs for this money rather than the interest rate each offers.

If you need capital preservation regardless of the time period you end up holding this deposit/investment, then bank CDs offer the best guarantee. Most CDs offer a small-to-modest penalty of a few months interest in the case of early withdrawal. TIPS on the other hand fluctuate in value and if you have to sell early you could lose some of your money. Principal is only guaranteed if held to maturity.

I assume the rates you are seeing for TIPS include the inflation component which is guaranteed for at least 6-months. Predicting the rate after that is not so simple so it's very possible TIPS will have worse returns than a CD if we enter a period of deflation.

By the way, have you checked out Series I Savings Bonds lately? I see them as a hybrid between CDs and TIPS and look very attractive these days for savings vehicles. They pay an inflation component just like the TIPS but their value is guaranteed as early withdrawal incurs a penalty of a few months of interest. However, you must hold the savings bond for at least 1 year as they have no value until after that first year has passed.

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