What is the best type of account to use for a Treasury Inflation Protected Securities (TIPS) ladder, constructed with incremental maturities to generate a constant risk-free stream of real future withdrawals via compounded inflation adjustments? In his February 2025 paper entitled "Best Asset Location for a TIPS Ladder", Edward McQuarrie models TIPS behaviors and tax rules to determine whether investors should hold TIPS ladders in: a taxable brokerage account; a tax-deferred account such as a 401(k) or traditional IRA; or, a tax-free account such as a Roth IRA. Potential tax treatments of TIPS ladder account withdrawals include:
- Maturing principal (initial capital), which is not taxed.
- Ordinary income (coupon).
- Tax-favored income, such as qualified dividends or long-term capital gains, with a rate as low as half that for ordinary income.
Only taxable brokerage accounts encounter all three treatments. All withdrawals from tax-deferred accounts are treated as ordinary income. Roth withdrawals are always tax-free. His baseline case is a 20-year TIPS ladder with $1 million initial funding, assuming a 2% real coupon at purchase with all maturities and coupon payments occurring at year-end. He initially assumes a 3% annual inflation rate but considers rates varying from 1% to 9%. He focuses on a 24% income tax rate. He discusses Original Issue Discount (OID), unrealized inflation adjustments, which is crucial to differences in tax rates across account types. Based on this modeling, he concludes that:
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