TIP ETF Tax question

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blood_donor
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TIP ETF Tax question

Post by blood_donor » Sun Jun 08, 2008 2:20 am

How does an ETF that holds TIPS (like, say, TIP) work, with taxes?
Does the fact that the TIPS are in an ETF save me from the nasty tax on the principle adjustment?

Is it as better to hold a TIPS ETF in a taxable account, compared to any other bond fund, or no different?

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DaveTH
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Post by DaveTH » Sun Jun 08, 2008 6:51 am

I believe a TIPs ETF avoids the "phantom income" problem of individual TIPs. However, they are still extremely tax inefficient and should not be placed in a taxable account unless you need the current income and liquidity.

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tfb
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Re: TIP ETF Tax question

Post by tfb » Sun Jun 08, 2008 9:58 am

blood_donor wrote:How does an ETF that holds TIPS (like, say, TIP) work, with taxes?
Does the fact that the TIPS are in an ETF save me from the nasty tax on the principle adjustment?

Is it as better to hold a TIPS ETF in a taxable account, compared to any other bond fund, or no different?
It works the same way an open-end TIPS mutual fund works. Although it doesn't have cash inflows, it can skim off some cash from maturing bonds or sell some bonds and then pay the money out to you for the required taxable distribution. It does save you some headache in figuring out the correct taxable amount and having enough distributions to pay the tax, but it doesn't save you from the tax itself. Holding TIP in a taxable account is no different than holding any other taxable bond fund.
Harry Sit, taking a break from the forums.

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