The bottom line seems to be that TIPS have a place in fixed income. The big drawback is that if in a taxable account, one has to pay the taxes each year on the inflationary growth of all TIPS holdings. When compared with equities, you lose the ability to hold the capital gain (the inflationary increase in the bond price...I know it is taxed as ordinary income) untaxed inside the investment until you are ready to sell or leave untaxed by dropping dead and passing to heirs with step-up basis. Further, in equities, you only pay the taxes on the pieces you sell, not on all stock holdings (the way you do TIPS).
In taxable, if inflation is low (say 0%), TIPS are great in that you are earning X% over inflation and paying taxes on that X%. They may be worse than nominals that could have been purchased earlier at a higher rate, but they are paying X% and there is no "phantom" income...and nobody knows what the future holds.
In taxable, if inflation is higher, TIPS are great in that you get all that inflation % PLUS X% interest. The problem is that when you factor in the taxes of the higher inflation that MUST BE PAID ANNUALLY on all TIPS holdings, your growth of X% is eroded and can reach 0% or negative %. Perhaps as inflation increases, the real yield increases too to make up for the tax difference (but of course, our marginal rates are not the same).
There is not much difference between the LTCG rate of 20%, the ordinary income rate of 22% or the ordinary income rate of 24%. Presumably, many would be paying the 3.8% NII tax in either LTCG or ordinary income.
I am thinking TIPS does have a place, but probably only in a tax deferred account. Sadly, my deferred only allows for a TIPS fund, Bloomberg US Treasury US TIPS TR USD. I am not even sure what this is beyond a TIPS fund (when I Google it I do not get much info).
In taxable, if inflation is low (say 0%), TIPS are great in that you are earning X% over inflation and paying taxes on that X%. They may be worse than nominals that could have been purchased earlier at a higher rate, but they are paying X% and there is no "phantom" income...and nobody knows what the future holds.
In taxable, if inflation is higher, TIPS are great in that you get all that inflation % PLUS X% interest. The problem is that when you factor in the taxes of the higher inflation that MUST BE PAID ANNUALLY on all TIPS holdings, your growth of X% is eroded and can reach 0% or negative %. Perhaps as inflation increases, the real yield increases too to make up for the tax difference (but of course, our marginal rates are not the same).
There is not much difference between the LTCG rate of 20%, the ordinary income rate of 22% or the ordinary income rate of 24%. Presumably, many would be paying the 3.8% NII tax in either LTCG or ordinary income.
I am thinking TIPS does have a place, but probably only in a tax deferred account. Sadly, my deferred only allows for a TIPS fund, Bloomberg US Treasury US TIPS TR USD. I am not even sure what this is beyond a TIPS fund (when I Google it I do not get much info).
Statistics: Posted by AceSD — Wed May 08, 2024 8:48 am — Replies 56 — Views 3822