TIPS???

[rpow53]

I am looking at transfering my savings to a tips account within my 457. I don't know too much about them . can anyone fill me in on the good and bad with them. also should I just transfer out of the 457 to a self directed account with fidelity or vanguard and invest my money in there fixed income accounts. any help is needed.
Thanks

 

[mickeyd]

I am looking at transfering my savings to a tips account within my 457. I don't know too much about them .

Red Flag Alert rpow53...


Never, Never invest in anything that you do not understand.

Research the subject online, read good books on the subject, read them again. Do not invest in TIPS (or any investment) until you are sure that they are correct for you and you understand them fully.

I happen to love TIPS and they are a full 50% of my fixed income asset allocation. But, you are not me and I am not you.

 

[MasterBlaster]

Individual - Treasury Inflation-Protected Securities (TIPS)

Individual - Comparison of TIPS and Series I Savings Bonds

Tips on TIPS and I-Bonds

Risks in Investing in TIPS - Explore Bonds

 

[kyounge1956]

I am looking at transfering my savings to a tips account within my 457. I don't know too much about them . can anyone fill me in on the good and bad with them. also should I just transfer out of the 457 to a self directed account with fidelity or vanguard and invest my money in there fixed income accounts. any help is needed.
Thanks

In addition to the good advice from mickeyd, ask yourself why you are considering taking the money out of your 457 account. If you do that, you will have to pay the taxes on it, and possibly also an early withdrawal penalty. There is probably at least one fixed income investment available in your 457 plan. Would it work with your overall asset allocation and investment goals to invest in that, rather than TIPs?

If you do investigate TIPs and decide to invest in them, ask the custodian for your 457 plan whether they have a self directed option within the plan. Some do and some don't. If they do, you may be able to invest in TIPs in your 457 even if that isn't one of the pre-selected funds (but even if this is available there will likely be restrictions and extra fees—it may be more expense and bother than it's worth). An alternative is, if you have another account, it may be possible to invest in TIPs (if appropriate for you) in that account rather than the 457 plan.

 

[Gearhead Jim]

Don't TIPS produce "phantom income" that you must pay taxes on even though you don't get your hands on the money immediately, unless held in a tax-sheltered account like the 457?

 

[MasterBlaster]

Don't TIPS produce "phantom income" that you must pay taxes on even though you don't get your hands on the money immediately, unless held in a tax-sheltered account like the 457?

yes, the principal value of TIPS bonds are stepped up by the CPI index. So the real value of the bond stays (CPI-adjusted) level. That step-up is taxable. So even though you only get income at the TIPS bond interest rate you pay taxes on both the interest and the basis step up every year. In years with high CPI inflation you could conceivably pay more in taxes than you get in interest.

If you hold the TIPS bonds in a qualified account (like an IRA) then you lose the state and local tax-exempt status.

 

[rpow53]

After some more research and all the advice I have decided to transfer the account over to vanguard where I will have more and better choices. thanks all for the help and advice.
Bob

 

[Stevewc]

I think the OP can roll the 457 into an IRA at vanguard and keep the tax advantage.
I assume that is what he/she is doing?
Just saying cause some folks seemed to think they were pulling out of tax advantage territory all together.
Steve

 

[kyounge1956]

I think the OP can roll the 457 into an IRA at vanguard and keep the tax advantage.
I assume that is what he/she is doing?
Just saying cause some folks seemed to think they were pulling out of tax advantage territory all together.
Steve

I certainly thought so. Sorry if I was mistaken! My only suggestion for rpow53 is, if you are moving the money from 457 plan to IRA, use a trustee-to-trustee transfer to avoid having tax withheld.

 

[rpow53]

I am doing a rollover IRA to vanguard which will allow me to keep it tax free until I take the money out at a later date. If you take this out in a lump sum then according to the calpers website you must pay 20% federal and 2% state tax. since I now live in florida I will pay no state tax when taken out later in life (5 to 10 yrs.)