PERSonalTime
Recycles dryer sheets
- Joined
- Jan 19, 2014
- Messages
- 456
Can someone give a basic definition and explanation of what TIPS are, how they're used, and how to purchase and redeem them? Thanks.
I like the TIPSwatch blog. Explained a lot of the esoteric details to me. Plus he gives very valuable historical perspective. They are pretty complex and best held in tax-deferred account and preferably until maturity.
https://tipswatch.com/
Agree with suggestions as to learning how to buy T-bills through a broker first before committing to the longer term TIPS. And you would have to sell on a secondary market to “redeem them” so better buy at auction through a broker.
Bought my first TIP this year - not in a tax advantaged account. My question is on tax reporting. It's a 5-year TIP that I'll hold till maturity, but I'll have to pay taxes on the inflated principal every year. If it inflates - the TIP face value is the maximum? Practically speaking, is the upper limit face value at maturity? If one just holds the TIP, it seems it would be hard to justify a loss in value, right?
And more to the meat of the matter - do I remember reading that the government doesn't send out year end tax statements? Does Vanguard do that or do I need to go to Treasury Direct and hunt. This will be my first year reporting TIP and T-bill income. My T-bills were bought through Treasury Direct, the TIP at Vanguard. Thanks -
taxes do complicate Tips and I never buy them in taxable. One key to understanding TiPS is to shift from nominal to real dollars for all financial thinking where possible.
taxes do complicate Tips and I never buy them in taxable. One key to understanding TiPS is to shift from nominal to real dollars for all financial thinking where possible.
Bought my first TIP this year - not in a tax advantaged account. My question is on tax reporting. It's a 5-year TIP that I'll hold till maturity, but I'll have to pay taxes on the inflated principal every year. If it inflates - the TIP face value is the maximum? Practically speaking, is the upper limit face value at maturity? If one just holds the TIP, it seems it would be hard to justify a loss in value, right?
And more to the meat of the matter - do I remember reading that the government doesn't send out year end tax statements? Does Vanguard do that or do I need to go to Treasury Direct and hunt. This will be my first year reporting TIP and T-bill income. My T-bills were bought through Treasury Direct, the TIP at Vanguard. Thanks -
Treasury Direct has the tax forms online early in the year. I don’t remember it being difficult to find. But that was for iBonds bought through my Treasury Direct account.
I assume a brokerage would provide the same tax reporting if you bought it through a broker. I wouldn’t expect to find it at Treasury Direct in this case.
Thanks! I think you're right.@PERSonalTime, you are getting good stuff here but I suspect it is a bit intimidating. Don't worry. You don't need to know how the watch works in order to know what time it is!
Rather than getting spun up on the mechanics of TIPS, I suggest you spend your time understanding the investment basics like how and when the inflation adjustments are made and on the tax aspects. You might like this one: https://www.amazon.com/Explore-TIPS-Practical-Inflation-Protected-Securities/dp/1449975909
From my POV:
It won't do you any harm to strap on the training wheels and buy a few T-Bills but I don't personally see the need. I don't do much with bonds but when I have a question or need help I just call the Schwab bond desk. They are not paid on commissions and are unfailingly patient and helpful. Whatever broker you use, there is probably a similar resource. Just use it and don't worry too much about how the watch works.
- Our TIPS are insurance against high inflation like we saw in the late 70s, early 80s and like we got a whiff of recently. Like fire insurance, there is a cost -- it is the difference in yield between standard government bonds and TIPS. You can never predict how much this insurance will cost, because you can't predict inflation. But that is the point of buying the insurance.
- Trying to do an exact yield calculation is silly, because it depends on future events that you can't predict.
- In order to be significant protection against high inflation TIPS must be a significant percentage of your portfolio. People often talk about 5% but IMO that's just silly. In our case TIPS comprise the majority of our low 7 figures fixed income portfolio and have since about 2006. We think that's enough protection.
To summarize, an investor buying $10,000 par actually paid $9,428.52 and will receive $10,133.50 in principal on the settlement date of November 30. After that, the investor will receive inflation accruals and a coupon yield of 1.375% until maturity on July 15, 2033.
With the nominal 10-year Treasury note trading with a yield of 4.41% at the auction’s close, this reopened TIPS got a 10-year inflation breakeven rate of 2.23%, a bit below recent trends. Again, this looks like a positive for investors. The breakeven rate indicates that CUSIP 91282CHP9 will outperform a nominal Treasury if inflation is higher than 2.23% over the next 9 years, 8 months.