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Author: Sonnet Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35400  
Subject: Vanguard Inflation Protected Securities Fund Date: 8/16/2002 1:19 AM
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I get two different stories about the use of Vanguards VIPSX and its use in a taxable account maybe someone can help me figure this out, this is from Vanguard's site.....

Is there anything else you want to touch on?
Mr. MacKinnon: Yes, investors should know that individual TIPS are not ideal inside taxable accounts because one has a tax liability on the phantom income that a TIPS produces. That is, the increases in principal value—reflecting the inflation adjustments—are taxable pieces of return, even though the Treasury does not pay out those increases until the bond matures. So individual TIPS generally should be purchased in a tax-deferred or tax-sheltered account, such as an IRA or 401(k) plan.

Investors in Vanguard Inflation-Protected Securities Fund do not experience the adverse consequences of phantom income. That's because the fund pays a quarterly distribution that accounts for both real coupon payments and inflation adjustments to our underlying holdings.

Thank you, Mr. MacKinnon.


And this from CBS market watch....

http://quote.fool.com/news/symbolnews.asp?currticker=&symbols=COST,VFINX,VIPSX&GUID=%7B9720C8A9%2DC4BF%2D4AF4%2DB813%2D5D05F9D559EA%7D

TIPS tip

Before investing in TIPS funds, FRC cautions investors to be aware of the capital gains ramifications for taxable accounts.

"The tax treatment is similar to that of zero-coupon bonds or original-issue discount bonds in that the increased value is taxed as 'phantom' income, even though the holder has not received cash for the inflation adjustment," explained FRC's Dow.

To avoid this problem, Dow recommends the use of such funds in a tax-deferred account such as a 401(k), IRA, or 529 plan.

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