Treasury Inflation-Protected Securities (TIPS)
Chapters in this video
- 0:00 The phantom income puzzle: taxes on cash you don't have
- 1:11 CPI-U, $100 minimum, and maturity options (5, 10, 30 years)
- 2:31 Fixed coupon rate, variable dollar amount
- 4:54 Deflation floor: principal at maturity only
- 6:25 Phantom income taxed as ordinary income
- 7:15 Suitability: TIPS belong in tax-deferred accounts
- 7:25 Rapid-fire exam recap
What this video covers
- How the Consumer Price Index for All Urban Consumers (CPI-U) drives principal adjustments while the coupon rate stays locked
- Why the fixed coupon rate produces a variable dollar amount of interest as principal rises with inflation or falls with deflation
- Where the deflation floor applies (original par value at maturity) and where it does not protect interest payments during the bond's life
- What phantom income is: the annual principal increase taxed as ordinary income before the investor ever receives the cash
- Why phantom income is taxed as ordinary income, not capital gains, in the year the adjustment accrues
- Which account type (IRA, 401(k)) represents the suitable recommendation for an investor who wants to avoid the annual phantom tax burden
- How TIPS minimum purchase, increments, maturities, and tax treatment at the state and local level compare to standard Treasury securities
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