Investors should weigh the 2.96% real yield of 30-year TIPS against the potential for phantom income to trigger higher Social Security taxation when held in taxable accounts rather than IRAs.
Article highlights the 30-year TIPS real yield of 2.96% but warns that taxable-account phantom income can increase Social Security taxation.
Article notes the 10-year TIPS real yield of 2.42% in the current yield environment while discussing tax placement considerations.
Article mentions I Bonds as a tax-deferred inflation-protected alternative with a current composite rate of 4.26%.
Retirees holding Treasury Inflation-Protected Securities (TIPS) in taxable brokerage accounts face a hidden tax risk known as phantom income. While 30-year TIPS currently offer a 2.96% real yield, inflation-adjusted principal increases can trigger higher taxation on Social Security benefits before the cash is actually received.
TIPS principal increases with inflation, and the IRS treats this annual increase as taxable income (OID) even though the investor does not receive that principal in cash until the bond matures.
The inflation-adjusted principal increase adds to your adjusted gross income (AGI). If this pushes your combined income above specific thresholds, a larger portion of your Social Security benefits becomes subject to federal income tax.