TIPS?

[PERSonalTime]

Can someone give a basic definition and explanation of what TIPS are, how they're used, and how to purchase and redeem them? Thanks.

 

[JoeWras]

Read the investopedia article

Investopedia article here: https://www.investopedia.com/terms/t/tips.asp

Read it.

My summary:
- Low declared interest rate (coupon) that pays periodically
- However, principal adjusted periodically based on inflation metrics
- This interplay between the two gives a regular adjusting real yield
- Complex
- Introduces new tax tasks, such as dealing with 1099-OID
- You pay tax on the inflated principal each year, it is not deferred
- You can get negative principal adjustments if inflation drops near zero. These explore new and exciting corners of the tax code.
- Buy at Treasury Direct, Fidelity, Vanguard or Schwab
- Selling at Treasury Direct is not possible, you must hold to maturity or transfer
- Sell at the others like you would any other bond: press a button and wait to get your bid accepted

With all due respect, if you have no idea where to purchase them, then you are behind the curve in understanding them enough to buy them. You really should first learn how to buy and sell a short term 4 week T-Bill, just to get the feeling of how your brokerage or Treasury Direct works. TIPS are incredibly complex compared to a T-Bill. This is especially true if bought on the secondary market. And if you don't know what "secondary market" is, learn the difference between an "auction" and "secondary" first before doing anything else.

A 6th grader can ask the question "What is a differential equation, and how do I solve one?" That's fine, but they first have to learn algebra and calculus first.

Yes, TIPs are the differential equations of bond investing.

BTW: iBonds are nothing like TIPs. iBonds simply adjust the rate. The rate is not adjusted in TIPs. If you are looking for something to move with inflation, consider iBonds first. Easier to understand and deal with at tax time.

 

[Mulligan]

Here is the Treasury cheat sheet version to compare TIPS from IBonds.

https://www.treasurydirect.gov/research-center/history-of-savings-bond/comparing-tips-to-i/

 

[PERSonalTime]

Thanks for the response!

 

[jebmke]

This might also be helpful

https://www.bogleheads.org/wiki/Treasury_Inflation_Protected_Security

 

[audreyh1]

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.

 

[jebmke]

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.

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.

 

[calmloki]

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 -

 

[JoeWras]

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 -

1) Is par value max? Answer: NOOOO!!! It can inflate away, way above the face value. You will pay taxes on this inflation each year.

The value can never go below par IF HELD TO MATURITY. What's that you say? Ah, well if we have deflation, it won't drop below par. Oh yeah, if we have deflation, your principal you may have gained earlier will go away as low as par. If you sell on the secondary, this statement does not apply and you can take an acid bath.

I'm an idiot and don't want to get into it too much, but I have a TIP or two bought above par when rates were nearly zero. I have seen things... Those things are called "Box 12" of a 1099-INT. Not a fun box to deal with.

2) Statements are on Treasury direct. You get an email that says, "Hey, check your tax link." Like most things on TD, it is hard to find. ANd when you find it, you will discover the worst possible formatted text in the history of 1099s.

For the TIP, you'll get a 1099-OID in addition to a 1099-INT. When it matures, you'll get a 1099-B. It's a great way to learn taxes, especially when you buy a TIP at premium like I did. Don't ever do this in a tax account.

Vanguard, Fidelity, etc. will list them in their 1099s too.

Finally, T-Bills are easy. Your Treasury Direct 1099-INT will be there and is very simple for T-Bills.

 

[audreyh1]

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.

That’s a good way to look at it. What I find especially helpful at TIPSwatch is the comparisons to the corresponding treasury note/bond including the historical comparisons.

 

[OldShooter]

@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:

1. 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.
   
2. Trying to do an exact yield calculation is silly, because it depends on future events that you can't predict.
   
3. 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.

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.

 

[MarieIG]

Rob Berger put out a new video on TIPs today (pros/ cons/ how to set up a ladder, etc.)

 

[Turbo29]

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.

I buy individual TIPS in tax advantaged accounts. I buy TIPS funds in taxable accounts, willingly paying the management fee to avoid the tax implications of individual TIPS.

 

[tulak]

Good summary from other posters. I’m another fan of tipswatch.com and they have a good write-up on the basics of TIPS with examples.

Another good resource is tipsladder.com, if you want to see how a TIPS ladder is built.

I’m a big fan of TIPS and I really think it helps to understand nominal vs real yield, especially when you are comparing TIPS with Treasuries/CDs/etc.

It’s easy to think, why would you buy a TIPS yielding 2.5%, but when you realize that’s a real yield and you get the inflation adjustment on top of that, it’s much more attractive. If we have 2-3% inflation, then the nominal yield of the TIPS will be 4.5-5.5%.

And I’m one of those that sticks with buying TIPS in tax-deferred accounts. It makes my life easier, which is one of my investment goals.

 

[Sunset]

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 -

I did the same thing with a 5 year TIP..

From now on I buy them only in IRA accounts..

So interested in the answer

 

[audreyh1]

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.

 

[JoeWras]

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.

All Tax stuff is in the same place on Treasury Direct iBonds and otherwise. I only say "difficult" because TD's UI is so clunky. Don't press the back button!

Basically, go like this:
- Click "ManageDirect(r)" on the tab bar
- Search the many links for "Manage My Taxes"
- Choose year
- Find the 1099 link at the top of pages of useless transactional details

They will also temporarily put the link up on the front page until April 15, sometimes.

 

[Cayman]

You may find that learning about TIPS is fun. (I say that because you're on this board).

The links and answers provided in this thread are a good start. If you want to address mid to long term inflation risk for the fixed income portion of your portfolio, a TIPS ladder comprising a significant portion of your FI allocation may meet your needs. I like the 2+% coupon rates, they're a rare bargain.

 

[Trailwalker]

I just completed a five year TIPs ladder in an IRA on Vanguard, starting with TIPs maturing in 2027. I haven't purchased on the secondary market before, so I was a bit nervous. But after the first one, it was like eating potato chips. My own ladder focused on low coupon TIPS at deep discounts, given the higher coupons at recent auctions. These will take the place of Wellesley funds that may do well over the next five years or so but may not.

 

[PERSonalTime]

@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:

1. 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.
   
2. Trying to do an exact yield calculation is silly, because it depends on future events that you can't predict.
   
3. 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.

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.

Thanks! I think you're right.

 

[Chuckanut]

Todays 10 year TIPS sale had a yield of 2.18% after inflation if held to maturity.

The inflation break even with regular treasuries is 2.23%.

Above and below is from the Tips Watch site - https://tipswatch.com/

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.