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I know this comes up often, but I have all my bonds in taxable even though I am in a 33% bracket (24% Fed + 9% CA state). This is my reasoning and a lot agree with me but then I see this type of video and 2nd guess if it's the right approach. The majority consensus seems to be that bonds belong in tax deferred but that does not seem right to me.
- Tax loss harvesting in taxable may be able to mitigate some of the tax consequences
- Bonds are paying little tax at the moment and it's almost near the yield of the S&P 500 at 2%, we're a long ways away from much higher interest rates. Also, I am in California that taxes qualified dividends as ordinary income so the tax differences between bonds and equities is even smaller.
- Access to cash, one of the reasons I have bonds is access to some capital that isn't volatile in case of some catastrophic need or even to take advantage of some opportunity. Withdrawing from a 401k has a 10% penalty and permanent loss of the tax advantaged space and a 401k loan is not recommended for anyone given the restrictions.
- Much faster growing assets such as equities makes sense in a tax advantaged space without tax drag.
- My 401k has a rubbish bond fund which is expensive, first off bonds don't return much, add in expenses and may as well set the cash on fire so makes no sense at all. 401k's don't always provide the proper options but at the very least most i've seen have a proper S&P 500 index fund that's low cost. Not true for bond funds though. In addition the size of my portfolio means that I would have to carry my entire 401k in bonds.
So, does this guy have a point here?
Note - I posted this on bogleheads once and virtually EVERYONE stated that bonds in taxable is really stupid and it always goes in tax deferred.
Then there is Dave Ramsey who says no bonds at all, NEVER. With so much conflicting advice do you blame the uninitiated to shy away from investing? LOL!
The question is do you want capital gains taxes ( stocks in a regular account) or regular tax on income. Can you take your bonds out of the deferred accounts with no tax penalty? If yes then leav them in the tax deferred account.