Muni's also often have their own quirks - being called is oftentimes one of them.If inflation is as expected, federal taxation of TIPS and nominal treasuries will be the same amount. If inflation is higher than expected, TIPS will return more and therefore will be taxed more. High bracket investors should have the resources to pay the tax on the TIPS inflation adjustment, or they could just sell TIPS or use a fund. (Inflation as measured by CPI, expected inflation as measured by the nominals-TIPS spread.)
I’m thinking of high tax bracket investor spending a couple of decades salting away money into a taxable account, and year after year the federal taxation of the Phantom income (plus NIIT) would grind away at a non-consumed TIPS ladder. The higher the marginal rate the worse it would get. And for the investor who finds most of their income to be at the highest tax bracket, April 15 could be very unpleasant. Municipal bonds seem to fit that scenario better. I think I saw the word “taxflation” used by another poster.
I’m not referring to somebody who wants to simply bridge from retirement until she takes Social Security at 70. i’m talking about a substantial sum in a taxable account.
Put another way, TIPS may not protect against inflation as much as might be hoped on an after-tax basis, but they do better than comparable nominal taxable bonds.
Will munis do better after-tax? Ex ante we don't know. It depends on many factors. There's certainly no guarantee munis will keep pace with inflation.
Cheers.
Statistics: Posted by dcabler — Mon Dec 29, 2025 7:29 am — Replies 69 — Views 4836