One of the blogs I love to read is www.tipswatch.com by David Enna. The blog covers, as you might imagine by the name, Treasury Inflation Protected Securities and a recent post had me thinking about my own bond portfolio. The crux of the matter is if you’ve been buying bonds for a long time and over a long period of time, those bonds eventually become redeemable.
Bonds becoming redeemable in of itself isn’t a bad thing unless you have hundreds of thousands of dollars worth of bonds that will mature and you have other tax deferred income coming to you such as distributions from an IRA, checks from social security and other income all at the same time. Call it the “Perfect Money Storm” and adding up all of these “incomes” turns into a tax nightmare because it pushes you to higher and higher tax brackets.
I would encourage any long time I-Bond holder to read David’s post here entitled, “Long-time I Bond Investors Face A Tax Time Bomb.” Despite having a good thing of high earning bonds in his portfolio, David appears to make the prudent choice to sell off some of the bonds to avoid huge tax bills later on down the road.
As of today, I have a mix of treasury bonds and I am now having to re-calculate some scenarios to see if I may fall into that tax time bomb trap. It’s one more thing to worry about when managing money.
I do plan on bidding for the 30 year TIPS auction to open on Feb 15th and factor that into my scenario.