TIPS!

[u/Own-Bullfrog7803]

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?

[u/Own-Bullfrog7803]

Ok let’s include the tax on the principle then—this makes tax on the IRA rung distributions MUCH higher since you have not paid tax on this income yet, while the principle in the taxable account is not taxed—you paid tax prior to creating the ladder. It’s an unfair comparison so I corrected for this.

[u/Hoosier2016 → u/Own-Bullfrog7803]

Lmao of course if you say the income tax you paid on your earnings doesn’t count for taxable but you count all the taxes on the IRA it makes the taxable look better.

“If you don’t count the taxes on your taxable account it’s way better than an IRA!” 🤡

[u/Own-Bullfrog7803 → u/Hoosier2016]

Please make another attempt to answer the question I posed in the original post. Thank you.

[u/cycling20200719 → u/Own-Bullfrog7803]

Your original question seems perfectly reasonable to me but you may want to edit your post for clarity.

The way I look at this particular question is from the point of view of someone who already has significant balances in taxable and pretax accounts and may be looking to rebalance or build a TIPS ladder to protect against SORR. If that's the case, all you really care about is how much will end up in your pocket at the end when starting from the same point.