TIPS are bonds issued by the federal government (through a bank, broker, or the Treasury) for five, ten and twenty year maturities. Their value grows to the extent of rising inflation. TIPS can also be bought in the form of mutual funds and ETFs.
Investors buy them for inflation protection, more than for interest they pay, which is comparatively low. With no inflation, returns are insignificant.
State and local taxes do not apply on U.S. Treasury obligations. However, additional interest paid because of inflation will be subject to federal tax (except in IRA accounts.)
Why buy them? I have never considered TIPS a valid bond inflation hedge, despite the publicity they get in the financial media.
TIPS have been bid up by demand, in excess of face value for that vaunted inflation protection. But you can get protection elsewhere. Even with other bond funds, yielding much higher returns and protection. You get that in diversified funds that reinvest interest every six months through shorter duration.
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