Bogleheads

DennisRoche · Joined: 17 Jun 2007 Posts: 114

I just picked up some 2026 TIPS at just over 3% real return for the ROTH accounts. Great deal. Many thanks to Mel and Larry for alerting the rest of us who don't watch these things too closely. I'm very happy to have such a great opportunity to shore up the fixed income side of my portfolio as the stock side continues to disappoint.

Let's suppose the TIPS rate rises even further while I-bonds continue to lag. At what TIPS rate would you'll think it's worthwhile even for taxable accounts? At 4%, I think I'd be willing to bite the bullet on taxes.

Beth · Joined: 05 Apr 2007 Posts: 283

Are you talking about any term in particular? Regards, Beth

wab · Joined: 23 Feb 2007 Posts: 559

The higher the TIPS yield, the more you pay in taxes.

It really depends on your tax rate. I buy TIPS for my mother's taxable account, but she is retired and in a low tax bracket.

DennisRoche · Joined: 17 Jun 2007 Posts: 114

Grandpaboys · Joined: 04 Mar 2007 Posts: 507 Location: Texas

Good question. I would also like to know the answer and also to what percentage of ones AA. Remembering when Mel told everyone to jump on I-Bonds. Is this the time to jump on Tips even in a taxable account?
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GP

Spirit Rider · Joined: 02 Mar 2007 Posts: 280

There are really two main questions to ask.

The tax deferred benefit of I-Bonds vs. the tax disadvantaged nature of TIPS and the relative benefits between inflation protected and nominal bonds.

You need a frame of reference between Savings Bonds and Treasury Bonds. The most common comparision I have seen is with 10yr bonds. This is because Savings Bonds can be redeemed after 5 years with no penalty, but continue to earn interest for up to 30 years. So 10 years seems like a good balance.

First, you need to compare current yields 10yr TIPS (3%) to 10yr Bonds (4%). So if you think the 10 yr inflation rate will be greater than 1%, TIPS is the clear winner.

Without knowing the detailed math to compare the tax benefits/disadvatages of IBonds/TIPS, clearly with a 3% spread TIPS/IBond real rates TIPS is the winner.

The only potential negative is that real rates go even higher and this decreases the value of the TIPS bond. However, Larry said in another thread that if you are holding to maturity, this is only an opportunity cost.

Beth · Joined: 05 Apr 2007 Posts: 283

It doesn't seem we have gotten to the meat of DennisRoche's query. Spirit Rider offers a rationale for preferring 10-yr TIPs to 10-yr Treasuries right now, but doesn't address the specific question whether that perceived preference can be sustained when the investor holds the TIPs in a taxable account and must pay taxes on "shadow" income. Rules of thumb have been crafted for preferring muni bonds when one's marginal rate exceeds X%. Is there a similar ROT for TIPs in a taxable account? I hope some of our TIPs experts will weigh in on this question. Regards, Beth

Tramper Al · Joined: 18 Oct 2007 Posts: 3227

DennisRoche · Joined: 17 Jun 2007 Posts: 114

Thanks very much, everyone, for a very insightful comparison of TIPS to I-bonds and other investments. Personally, I can't fathom why someone with a long-term horizon would prefer a CD in a taxable account to TIPS at the current rates. Short-term, I can understand, since you risk some principal with TIPS but not with CDs. Perhaps there are some tax-free municipal bonds that might beat 3% TIPS for those in the highest brackets. I don't know.

I also understand that some people are worried that TIPS could lose money if there is deflation for more than half the bond's duration. Since I hold 20 yr bonds and could hold for 18 yrs, it's not something that I'm losing sleep over.

Beth · Joined: 05 Apr 2007 Posts: 283

for the thoughtful post. I think you are right, the central question is "compared to what?" and perhaps the "answer" is that TIPs are a one-off product where one has to prioritize one's objectives and then decide whether the product is suitable in one's taxable account all things considered. It is unfortunate that one can purchase TIPs virtually without limit while I Bonds are curtailed to $10,000 per SSN per year. Regards, Beth

tonythered · Joined: 24 Apr 2008 Posts: 644

Hi and sorry to resurrect an old thread... but I am still not clear from the discussion here. Is there a general grid available anywhere that we can follow to determine if certain yields of TIPS are decent enough to hold in taxable accounts for certain tax brackets?

In other words, 15% bracket may mean any TIPS yield > 1% is fine. 25% may require 2%, and so on.

Or am I asking an impossible question?

Thank you!

Spirit Rider · Joined: 02 Mar 2007 Posts: 280