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Editorial See other Editorial Articles Title: A Good Analysis of TIP Bonds o "If my choice is cash or gold - I'll choose TIPS." I'm happy to sell them to you, and so is Timmy. TIPS are unique among asset classes in that they are guaranteed to lose purchasing power if held to maturity. As you know, the accretion (the portion of the TIPS value that increases with the CPI) is taxed, and it is taxed yearly, not at maturity or sale. It is also taxed as ordinary income just like the interest portion (if there is any). Even if you assume that the CPI accurately tracks your cost of living (probably laughable), you are guaranteed to lose purchasing power due to taxes. These instruments do not have enough absolute yield to compensate for the taxation of CPI-derived accretion. You might argue that you can hold TIPS in a sheltered account and turn a profit, but it's probably not true unless you really believe that the CPI overstates your cost of living. I'm sure there's someone whose lifestyle and purchasing patterns make this true, but for the other 99.99% of us, it's a sure thing: TIPS are a loser. And why should this surprise us? If you were the Treasury, selling TIPS is almost an ideal scam: you get to tax both the accretion and the interest, and you get to decide what the accretion factor is going to be! It's as if I could issue you a bond and then decide each year how much interest I want to pay you, also knowing that I'm going to get 1/3 of it back from you no matter what. Madoff had nothing on these guys for the sheer brass of it all.
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