More TIPS Questions

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Prudence
Posts: 765
Joined: Fri Mar 09, 2012 4:55 pm

More TIPS Questions

Post by Prudence »

If I buy TIPS at auction (including any terms, new issue or reissue etc.) by submitting orders to my Vanguard brokerage account (traditional ira), will they be held in my VG account or Treasury Direct?
If I hold TIPS in my VG ira, may I do an in-kind transfer to my taxable account in order to satisfy an RMD?
If so, how is the valuation of the RMD calculated (e.g. price and market value of TIPS including accrued interest at time of transfer or some other basis)?
fabdog
Posts: 2151
Joined: Wed Jan 16, 2013 1:59 pm
Location: Williamsburg VA

Re: More TIPS Questions

Post by fabdog »

If you buy on Vanguard's platform, they will be held in your Vanguard account. you only hold securities at TD that you buy directly from them, and TD does not support IRA's

Yes, but why would you want to do that? One of the benefits of holding TIPS in tax deferred accounts is not having to recognize (and pay tax on) the inflation adjustments that are recognized each year but you don't actually get till the bond matures.

I assume the market price would be the value towards satisfying your RMD

Mike
Topic Author
Prudence
Posts: 765
Joined: Fri Mar 09, 2012 4:55 pm

Re: More TIPS Questions

Post by Prudence »

fabdog wrote: Wed Nov 23, 2022 12:54 pm If you buy on Vanguard's platform, they will be held in your Vanguard account. you only hold securities at TD that you buy directly from them, and TD does not support IRA's

Yes, but why would you want to do that? One of the benefits of holding TIPS in tax deferred accounts is not having to recognize (and pay tax on) the inflation adjustments that are recognized each year but you don't actually get till the bond matures.

I assume the market price would be the value towards satisfying your RMD

Mike
Good question. Suppose my TIPS matures in 2030. May I do an in-kind transfer to taxable for an RMD in, say 2028, so I can keep the TIPS and the YTM until maturity?
ruud
Posts: 754
Joined: Sat Mar 03, 2007 1:28 pm
Location: san francisco bay area

Re: More TIPS Questions

Post by ruud »

Prudence wrote: Wed Nov 23, 2022 1:00 pm Suppose my TIPS matures in 2030. May I do an in-kind transfer to taxable for an RMD in, say 2028, so I can keep the TIPS and the YTM until maturity?
Even if you can't do an in-kind transfer, you could just sell in the IRA and buy the same bond in the taxable account. Whatever the effect of interest rates would be, it would affect both transactions the same.
.
Topic Author
Prudence
Posts: 765
Joined: Fri Mar 09, 2012 4:55 pm

Re: More TIPS Questions

Post by Prudence »

ruud wrote: Wed Nov 23, 2022 1:13 pm
Prudence wrote: Wed Nov 23, 2022 1:00 pm Suppose my TIPS matures in 2030. May I do an in-kind transfer to taxable for an RMD in, say 2028, so I can keep the TIPS and the YTM until maturity?
Even if you can't do an in-kind transfer, you could just sell in the IRA and buy the same bond in the taxable account. Whatever the effect of interest rates would be, it would affect both transactions the same.
Suppose I buy the 2030 TIPS today with a YTM of 1.6%. If I do as you say and sell it in 2028 to satisfy my RMD and buy another 2030, suppose the YTM is now 0.0%. This is what I am trying to avoid.
User avatar
Kevin M
Posts: 13920
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: More TIPS Questions

Post by Kevin M »

In terms of individual securities, awhile back I bought a Treasury maturing on 12/15/2022 to satisfy my RMD. However, all the other holdings in this account, other than some cash in the settlement fund, are in intermediate- and long-term bond funds, so I'll have to sell some of those for the 2023 RMD.

Vanguard will include whatever they peg the value at on 12/31/2022 in your ending account balance on 12/31/2022, which is what you use to figure your 2023 RMD.
If I make a calculation error, #Cruncher probably will let me know.
User avatar
Kevin M
Posts: 13920
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: More TIPS Questions

Post by Kevin M »

Prudence wrote: Wed Nov 23, 2022 1:32 pm
ruud wrote: Wed Nov 23, 2022 1:13 pm
Prudence wrote: Wed Nov 23, 2022 1:00 pm Suppose my TIPS matures in 2030. May I do an in-kind transfer to taxable for an RMD in, say 2028, so I can keep the TIPS and the YTM until maturity?
Even if you can't do an in-kind transfer, you could just sell in the IRA and buy the same bond in the taxable account. Whatever the effect of interest rates would be, it would affect both transactions the same.
Suppose I buy the 2030 TIPS today with a YTM of 1.6%. If I do as you say and sell it in 2028 to satisfy my RMD and buy another 2030, suppose the YTM is now 0.0%. This is what I am trying to avoid.
Why? The TIPS in your IRA now has a yield of 0%, and the price has gone up a lot due to the drop in real yield. It does not matter what the yield was when you bought it. Your RMD will be larger because of this. There is no difference between holding the TIPS at a current 0% YTM, and selling it and buying it again, other than the bid/ask spread, which could be significant for TIPS, so I would avoid doing it.
If I make a calculation error, #Cruncher probably will let me know.
Topic Author
Prudence
Posts: 765
Joined: Fri Mar 09, 2012 4:55 pm

Re: More TIPS Questions

Post by Prudence »

Kevin M wrote: Wed Nov 23, 2022 1:37 pm
Prudence wrote: Wed Nov 23, 2022 1:32 pm
ruud wrote: Wed Nov 23, 2022 1:13 pm
Prudence wrote: Wed Nov 23, 2022 1:00 pm Suppose my TIPS matures in 2030. May I do an in-kind transfer to taxable for an RMD in, say 2028, so I can keep the TIPS and the YTM until maturity?
Even if you can't do an in-kind transfer, you could just sell in the IRA and buy the same bond in the taxable account. Whatever the effect of interest rates would be, it would affect both transactions the same.
Suppose I buy the 2030 TIPS today with a YTM of 1.6%. If I do as you say and sell it in 2028 to satisfy my RMD and buy another 2030, suppose the YTM is now 0.0%. This is what I am trying to avoid.
Why? The TIPS in your IRA now has a yield of 0%, and the price has gone up a lot due to the drop in real yield. It does not matter what the yield was when you bought it. Your RMD will be larger because of this. There is no difference between holding the TIPS at a current 0% YTM, and selling it and buying it again, other than the bid/ask spread, which could be significant for TIPS, so I would avoid doing it.
I still don't get it. For example, I buy the 2030 TIPS today in the secondary market for $1,000 with 1.6% YTM (making all these numbers up BTW). In 2028 (for some dumb reason), I sell it to satisfy an RMD for $1,300. I then buy a "new" 2030 TIPS in taxable for $1,000 with a YTM of 0.0%. When the TIPS matures in 2030, I get back my $1,000 plus inflation adjustments and interest. Why do I come out the same as if I had done an in-kind transfer? Did I forget to factor in the extra $300 of appreciation realized from the sale in 2028?
User avatar
vineviz
Posts: 14180
Joined: Tue May 15, 2018 1:55 pm
Location: Baltimore, MD

Re: More TIPS Questions

Post by vineviz »

Prudence wrote: Wed Nov 23, 2022 1:32 pm
ruud wrote: Wed Nov 23, 2022 1:13 pm
Prudence wrote: Wed Nov 23, 2022 1:00 pm Suppose my TIPS matures in 2030. May I do an in-kind transfer to taxable for an RMD in, say 2028, so I can keep the TIPS and the YTM until maturity?
Even if you can't do an in-kind transfer, you could just sell in the IRA and buy the same bond in the taxable account. Whatever the effect of interest rates would be, it would affect both transactions the same.
Suppose I buy the 2030 TIPS today with a YTM of 1.6%. If I do as you say and sell it in 2028 to satisfy my RMD and buy another 2030, suppose the YTM is now 0.0%. This is what I am trying to avoid.
If you will have an RMD in 2028, why not just match up a 2028 TIPS that will mature in that year instead of messing with the hassle of managing a 203O TIPS for a 2028 RMD?

Or just use mutual funds instead.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Topic Author
Prudence
Posts: 765
Joined: Fri Mar 09, 2012 4:55 pm

Re: More TIPS Questions

Post by Prudence »

vineviz wrote: Wed Nov 23, 2022 2:56 pm
Prudence wrote: Wed Nov 23, 2022 1:32 pm
ruud wrote: Wed Nov 23, 2022 1:13 pm
Prudence wrote: Wed Nov 23, 2022 1:00 pm Suppose my TIPS matures in 2030. May I do an in-kind transfer to taxable for an RMD in, say 2028, so I can keep the TIPS and the YTM until maturity?
Even if you can't do an in-kind transfer, you could just sell in the IRA and buy the same bond in the taxable account. Whatever the effect of interest rates would be, it would affect both transactions the same.
Suppose I buy the 2030 TIPS today with a YTM of 1.6%. If I do as you say and sell it in 2028 to satisfy my RMD and buy another 2030, suppose the YTM is now 0.0%. This is what I am trying to avoid.
If you will have an RMD in 2028, why not just match up a 2028 TIPS that will mature in that year instead of messing with the hassle of managing a 203O TIPS for a 2028 RMD?

Or just use mutual funds instead.
I am just trying to understand the mechanics of this nutty TIPS product. Suppose I had a 2045 TIPS and I decide to sell it in 2028 to satisfy an RMD?
dbr
Posts: 43078
Joined: Sun Mar 04, 2007 9:50 am

Re: More TIPS Questions

Post by dbr »

Prudence wrote: Wed Nov 23, 2022 3:02 pm
vineviz wrote: Wed Nov 23, 2022 2:56 pm
Prudence wrote: Wed Nov 23, 2022 1:32 pm
ruud wrote: Wed Nov 23, 2022 1:13 pm
Prudence wrote: Wed Nov 23, 2022 1:00 pm Suppose my TIPS matures in 2030. May I do an in-kind transfer to taxable for an RMD in, say 2028, so I can keep the TIPS and the YTM until maturity?
Even if you can't do an in-kind transfer, you could just sell in the IRA and buy the same bond in the taxable account. Whatever the effect of interest rates would be, it would affect both transactions the same.
Suppose I buy the 2030 TIPS today with a YTM of 1.6%. If I do as you say and sell it in 2028 to satisfy my RMD and buy another 2030, suppose the YTM is now 0.0%. This is what I am trying to avoid.
If you will have an RMD in 2028, why not just match up a 2028 TIPS that will mature in that year instead of messing with the hassle of managing a 203O TIPS for a 2028 RMD?

Or just use mutual funds instead.
I am just trying to understand the mechanics of this nutty TIPS product. Suppose I had a 2045 TIPS and I decide to sell it in 2028 to satisfy an RMD?
Right. figuring out how it all works can be an itch that needs to be scratched.

But, seriously, for an IRA with RMDs it probably really is a lot more straightforward to just own a fund and cash out what is needed for the RMD. My 401k is nothing but a TIPS fund and it is very simple to just take the RMD in a simple manner. The rate of withdrawal is so small over so many years that there is not a lot of incentive to parcel everything out in individual TIPS.
ruud
Posts: 754
Joined: Sat Mar 03, 2007 1:28 pm
Location: san francisco bay area

Re: More TIPS Questions

Post by ruud »

Prudence wrote: Wed Nov 23, 2022 3:02 pm I am just trying to understand the mechanics of this nutty TIPS product. Suppose I had a 2045 TIPS and I decide to sell it in 2028 to satisfy an RMD?
If the YTM drops, the price rises.
So you buy $10,000 worth of TIPS today.
In 2028, let’s say the YTM dropped and buying the same TIPS would cost $15,000.
But… the TIPS in your IRA is also worth $15,000 now.

You sell it for $15,000 in the IRA; withdraw $15,000 from the IRA; and buy the same TIPS for $15,000 in taxable.
(As Kevin M pointed out, you’ll lose a bit on the bid/ask spread)
.
FactualFran
Posts: 2060
Joined: Sat Feb 21, 2015 2:29 pm

Re: More TIPS Questions

Post by FactualFran »

Prudence wrote: Wed Nov 23, 2022 3:02 pm I am just trying to understand the mechanics of this nutty TIPS product. Suppose I had a 2045 TIPS and I decide to sell it in 2028 to satisfy an RMD?
Standard advice is to avoid products that one deems to be nutty. If you had a 2045 TIPS and decided to sell it in 2028, then the proceeds that you will receive from the sale will depend on what someone is willing to pay for it at the time of the sale. The proceeds will not necessarily be at least what the RMD turns out to be.
User avatar
Kevin M
Posts: 13920
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: More TIPS Questions

Post by Kevin M »

Prudence wrote: Wed Nov 23, 2022 2:03 pm
Kevin M wrote: Wed Nov 23, 2022 1:37 pm
Prudence wrote: Wed Nov 23, 2022 1:32 pm
ruud wrote: Wed Nov 23, 2022 1:13 pm
Prudence wrote: Wed Nov 23, 2022 1:00 pm Suppose my TIPS matures in 2030. May I do an in-kind transfer to taxable for an RMD in, say 2028, so I can keep the TIPS and the YTM until maturity?
Even if you can't do an in-kind transfer, you could just sell in the IRA and buy the same bond in the taxable account. Whatever the effect of interest rates would be, it would affect both transactions the same.
Suppose I buy the 2030 TIPS today with a YTM of 1.6%. If I do as you say and sell it in 2028 to satisfy my RMD and buy another 2030, suppose the YTM is now 0.0%. This is what I am trying to avoid.
Why? The TIPS in your IRA now has a yield of 0%, and the price has gone up a lot due to the drop in real yield. It does not matter what the yield was when you bought it. Your RMD will be larger because of this. There is no difference between holding the TIPS at a current 0% YTM, and selling it and buying it again, other than the bid/ask spread, which could be significant for TIPS, so I would avoid doing it.
I still don't get it. For example, I buy the 2030 TIPS today in the secondary market for $1,000 with 1.6% YTM (making all these numbers up BTW). In 2028 (for some dumb reason), I sell it to satisfy an RMD for $1,300. I then buy a "new" 2030 TIPS in taxable for $1,000 with a YTM of 0.0%. When the TIPS matures in 2030, I get back my $1,000 plus inflation adjustments and interest. Why do I come out the same as if I had done an in-kind transfer? Did I forget to factor in the extra $300 of appreciation realized from the sale in 2028?
The 7/15/2030 TIPS price at 1.6% yield bought today (yield is actually 1.50%) would be 89.43. At a yield of 0% on 7/15/2028 the price would be 100.25, which is a 12.05% real price return (not annualized). If there were no bid/ask spread, you would sell it on 7/15/2028 for 100.25, and buy it in taxable for 100.25. In reality, you will get a slightly lower price when you sell and pay a higher price when you buy. Today the sell price is 90.028 and the buy price is 90.117, which is a loss of about 10 basis points in price. Translating this to $1,000 face value, you would receive 900.28 and pay 901.17 in real terms (and both would be adjusted by the same inflation factor to get adjusted price).
If I make a calculation error, #Cruncher probably will let me know.
User avatar
vineviz
Posts: 14180
Joined: Tue May 15, 2018 1:55 pm
Location: Baltimore, MD

Re: More TIPS Questions

Post by vineviz »

Prudence wrote: Wed Nov 23, 2022 3:02 pm I am just trying to understand the mechanics of this nutty TIPS product. Suppose I had a 2045 TIPS and I decide to sell it in 2028 to satisfy an RMD?
I'm not sure what's particular nutty about TIPS.

If you held VBMFX in an IRA, when it was time for a RMD it would feel right as rain to sell VBMFX to satisfy the RMD requirement and then use the proceeds to buy VMBFX in a taxable account I suspect.

Selling a TIPS in the IRA, taking the distribution, then using the proceeds to buy the exact same TIPS in taxable should feel just as right.

On the other hand, just using a TIPS mutual fund or ETF would largely accomplish the same thing with less confusion for someone who isn't experienced with buying and selling individual bonds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Topic Author
Prudence
Posts: 765
Joined: Fri Mar 09, 2012 4:55 pm

Re: More TIPS Questions

Post by Prudence »

dbr wrote: Wed Nov 23, 2022 3:30 pm
Prudence wrote: Wed Nov 23, 2022 3:02 pm
vineviz wrote: Wed Nov 23, 2022 2:56 pm
Prudence wrote: Wed Nov 23, 2022 1:32 pm
ruud wrote: Wed Nov 23, 2022 1:13 pm

Even if you can't do an in-kind transfer, you could just sell in the IRA and buy the same bond in the taxable account. Whatever the effect of interest rates would be, it would affect both transactions the same.
Suppose I buy the 2030 TIPS today with a YTM of 1.6%. If I do as you say and sell it in 2028 to satisfy my RMD and buy another 2030, suppose the YTM is now 0.0%. This is what I am trying to avoid.
If you will have an RMD in 2028, why not just match up a 2028 TIPS that will mature in that year instead of messing with the hassle of managing a 203O TIPS for a 2028 RMD?

Or just use mutual funds instead.
I am just trying to understand the mechanics of this nutty TIPS product. Suppose I had a 2045 TIPS and I decide to sell it in 2028 to satisfy an RMD?
Right. figuring out how it all works can be an itch that needs to be scratched.

But, seriously, for an IRA with RMDs it probably really is a lot more straightforward to just own a fund and cash out what is needed for the RMD. My 401k is nothing but a TIPS fund and it is very simple to just take the RMD in a simple manner. The rate of withdrawal is so small over so many years that there is not a lot of incentive to parcel everything out in individual TIPS.
Agree. The fund approach seems a good match for me since I haven't identified a use for the funds in the ira yet, except that I want it to house my bond portfolio. I am considering VG intermediate TIPS and Pimco LT TIPS (LTPZ - the av maturity, average duration and current YTM of 4.15% are interesting).
dbr
Posts: 43078
Joined: Sun Mar 04, 2007 9:50 am

Re: More TIPS Questions

Post by dbr »

Prudence wrote: Wed Nov 23, 2022 4:47 pm
dbr wrote: Wed Nov 23, 2022 3:30 pm
Prudence wrote: Wed Nov 23, 2022 3:02 pm
vineviz wrote: Wed Nov 23, 2022 2:56 pm
Prudence wrote: Wed Nov 23, 2022 1:32 pm
Suppose I buy the 2030 TIPS today with a YTM of 1.6%. If I do as you say and sell it in 2028 to satisfy my RMD and buy another 2030, suppose the YTM is now 0.0%. This is what I am trying to avoid.
If you will have an RMD in 2028, why not just match up a 2028 TIPS that will mature in that year instead of messing with the hassle of managing a 203O TIPS for a 2028 RMD?

Or just use mutual funds instead.
I am just trying to understand the mechanics of this nutty TIPS product. Suppose I had a 2045 TIPS and I decide to sell it in 2028 to satisfy an RMD?
Right. figuring out how it all works can be an itch that needs to be scratched.

But, seriously, for an IRA with RMDs it probably really is a lot more straightforward to just own a fund and cash out what is needed for the RMD. My 401k is nothing but a TIPS fund and it is very simple to just take the RMD in a simple manner. The rate of withdrawal is so small over so many years that there is not a lot of incentive to parcel everything out in individual TIPS.
Agree. The fund approach seems a good match for me since I haven't identified a use for the funds in the ira yet, except that I want it to house my bond portfolio. I am considering VG intermediate TIPS and Pimco LT TIPS (LTPZ - the av maturity, average duration and current YTM of 4.15% are interesting).
Sounds like a good fit for you.
Post Reply