TIPS open up a can of worms that most people probably don't want to deal with, unless the bonds are held in a tax-advantaged account (such as an IRA). Here's the skinny straight from the horse's mouth:[1]
Form 1099-OID shows the amount by which
the principal of your TIPS increased due
to inflation or decreased due to deflation.
Increases in principal are taxable for the
year in which they occur, even if your
TIPS hasn't matured, so you haven't yet
received a payment of principal.
I.e., you must pay annual taxes on an increase in principal for your TIPS bonds, even though you don't get your cash back from the govt until the bond matures.
No thanks! Count me out of that one!
As a possible alternative (which has its own problems) there are Series I savings bonds (which also attempt to compensate for inflation). Those have the advantage of:[2]
Tax reporting of interest can be deferred
until redemption, final maturity, or other
taxable disposition, whichever occurs first.
No thanks! Count me out of that one!
As a possible alternative (which has its own problems) there are Series I savings bonds (which also attempt to compensate for inflation). Those have the advantage of:[2]
[1] http://www.treasurydirect.gov/indiv/research/indepth/tips/re... [2] http://www.treasurydirect.gov/indiv/products/prod_tipsvsibon...