Investing in TIPS

[Gearhead Jim]

I'm considering putting about 100k into TIPS. My understanding is that the principal increase due to inflation gets taxed each year, so holding them in a standard IRA is preferable to a Roth IRA.

Since the after-inflation interest rate varies from year to year, and is not very high right now (~2.4%), one might argue for investing over several years to avoid perhaps getting in at the interest rate bottom. It would also be nice to have the maturities laddered, to avoid having to reinvest the money all at once. What is the best way to acquire and hold the TIPS in a situation like this? Other suggestions on TIPS?

 

[retire@40]

I'm considering putting about 100k into TIPS. My understanding is that the principal increase due to inflation gets taxed each year, so holding them in a standard IRA is preferable to a Roth IRA.

You lost me on this one. Why would holding them in a standard IRA be preferable to a Roth IRA?

 

[wabmester]

The treasury only offers 5- 10- and 20-year maturities as new issues, so it would take you a while to build a ladder with new issues.

I have a mix of new and secondary issues, and I interleave TIPS with nominal bonds to create a ladder than goes out about 10 years. Each year as something matures, I can make a decision to reinvest in nominal or inflation-indexed, or just spend it. I make the decision based on current yields at the time, budget, market timing rebalancing considerations, etc.

 

[Gearhead Jim]

You lost me on this one. Why would holding them in a standard IRA be preferable to a Roth IRA?

Actually, I lost myself on that one. I meant to say that I believe TIPS should be in a tax deferred account like an IRA, as opposed to an "ordinary" account.

 

[Gearhead Jim]

wab-
How do you buy the TIPS with money that is already in an IRA? Or move money from one IRA to a newly created TIPS IRA? The exact method of purchase and how to convert from say, a CD to a TIPS, eludes me. I checked at the local hardware store today, they don't sell TIPS...

 

[wabmester]

Do you have your IRA at the same place you have a brokerage account?

I have mine mostly at Vanguard. You need a VBS account associated with your IRA, and then you just buy bonds through their virtual bond desk.

New issues are sold via auction from the treasury. You can find the schedules and other info here:

link

Vanguard doesn't charge any fee for bonds purchased at auction for Flagship accounts. I think there may be a small fee for other accounts.

If you're not comfortable with buying bonds directly, consider the TIP ETF or a fund like VIPSX instead. Also, check out the threads on ISM.

 

[Gearhead Jim]

Do you have your IRA at the same place you have a brokerage account?


NO, BUT I'LL CHANGE THAT. THANKS FOR THE OTHER INFO.

I have mine mostly at Vanguard. You need a VBS account associated with your IRA, and then you just buy bonds through their virtual bond desk.

New issues are sold via auction from the treasury. You can find the schedules and other info here:

link

Vanguard doesn't charge any fee for bonds purchased at auction for Flagship accounts. I think there may be a small fee for other accounts.

If you're not comfortable with buying bonds directly, consider the TIP ETF or a fund like VIPSX instead. Also, check out the threads on ISM.

 

[jdmorton]

Wab, Thanks for the TIPS Link

I've been wondering about TIPS. Does anyone invest in them directly from the Federal Govt.?

 

[Lsbcal]

I've purchased a reasonable amount of TIPS this year. Would recommend people look at Larry Swedroe's bond book, Appendix B which lays out a strategy for purchases and sales. Since he published that book there has been some dialog on the Vanguard Diehard's site in which he suggests possibly extending maturities if real rates go above say 3% -- but this is a fine point in the strategy.

BTW, the historical intermediate real rate of returns is around 2.3% so now is not a bad time to start purchases. Note this historic return masks a lot of ups/downs.

Les