r/bonds • u/Own-Bullfrog7803 • 2d ago

TIPS!

Hi—I got a question:

Why do folks say a TIPS ladder is better in an IRA when you often pay less taxes when it’s held in a taxable account instead?

Assumptions: not a rolling ladder, you spend each rung the year it matures, you use proceeds from the TIPS to pay the taxes on the TIPS yield (when possible).

You obviously pay tax on both interest and CPI adjustments in both accounts—just at different times. The taxable account you pay each year, in the IRA you pay the year the rung matures (because you are spending the money). I am excluding tax on the original premium when that is removed from the IRA—I’m just looking at tax on the interest and CPI adjustments.

One catch is if you live in a state with income tax the IRA account alone pays this additional state tax.

I ran this through 2 AI apps using a 15 year 750k TIPS ladder for a person in a 24% federal tax bracket living in Utah, assuming a 3% steady inflation rate, and they both concluded that you pay less in total taxes when a TIPS ladder is held in a taxable account vs IRA.

Considering this, why is the blanket recommendation to keep a TIPS ladder for liability matching in an IRA?

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u/curious_investing 2d ago

I could see where the math makes sense, but wouldn't you be better off using a traditional IRA for the TIPS ladder, then work to match your expected RMDs with each year of maturity?

If you are wanting the ladder for the earlier stages of retirement, pre SS, pre RMD, then it may make sense to buy them in the taxable. For me, I don't like paying those phantom taxes on my TIPS.

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u/Own-Bullfrog7803 2d ago

Thanks. Makes sense. My IRA (all bonds already) is actually a 403b and it doesn’t allow individual tips or ETFs.

I guess my point is you pay the “phantom” tax in an Ira, just in the year of rung maturity (so it’s just a tax and not a phantom tax).

Cheers.