Holding bonds in pre tax accounts

[pb4uski]

We're just going to be taking the tax torpedo in the gut. .....

But will your marginal tax rate when you withdraw be higher than when you deferred the income... if so then you are better off.. if not then you ended up being more successful than you expected... either way... you won!!

 

[bingybear]

That is true, but lucky for me at the present time, my qualified dividend income is taxed at 0% just as my LTCG are taxed at 0%.

OTOH, I offset capital gains with harvested losses from the past, so one could say that with another $3,000 used to offset income, I can write that the $3,000 offsets non-qualified dividend income. Furthermore, if I get a foreign tax credit of say $1,000 a year, that would be like offsetting the tax on $1,000/0.15 or another $6,667 of non-qualified dividend income. Since my ratio of QDI: nonQDI is about 80:20, that means I can have more than $40,000 in dividend income before I pay taxes on it. And at 2% yield that's a $2,000,000 taxable portfolio.

And the above doesn't even include exemptions and deductions which I can say offset Roth conversions. Nor does it include return-of-capital which is tax-free and doesn't really show up on one's tax return.

+1 Similar here. All after tax are equity etf's, carry over losses. I end up with choices of Roth conversions, ACA subsidy, or realizing more gains (have not done this yet as we have a lot of carry over losses).
I also don't agree with bonds having low distributions. My largest bond holding, PIMIX is distributing around 5% in my TIRA. I'm 56, but no need to withdraw from any retirement accounts. I really don't see how putting most equity in TIRA would be a good thing in my case.

 

[audreyh1]

But will your marginal tax rate when you withdraw be higher than when you deferred the income... if so then you are better off.. if not then you ended up being more successful than you expected... either way... you won!!

No, our marginal rate was probably 25 to 31.50% when we deferred most of the income.

And now most years it's been AMT at 26%. It would be 15% but cap gains push most of the ordinary income into AMT. Ordinary income is well under the 15% bracket top.

I think starting next year we may be able to avoid AMT. thus all ordinary income will be taxed at 15%. But also 2018 MAGI starts to be tracked for Medicare premium purposes.

Ultimately SS and RMDs will push us above the 15% bracket probably into 25%.

 

[tdv2]

I need to make a few more slight adjustments but I think what I’m hearing is pretty much what I expected.

1. Assets that produce ordinary income are best held in tax deferred accounts. (Especially when earned income has you in a high tax bracket)
2. Equities i.e. common stocks, stock index funds, etc. providing both qualified dividends and capital gains are best held in taxable accounts. (0% to 15% max tax rate depending on income)

What’s left for me is to figure the Roth conversion equation out when I stop having earned income. Will do some searches on Roth conversion strategies before asking too many questions.

 

[LOL!]

2. Equities i.e. common stocks, stock index funds, etc. providing both qualified dividends and capital gains are best held in taxable accounts. (0% to 15% max tax rate depending on income)

I think the max tax rate on qualified dividends and LT capital gains is something like 23.8% if one's income is high enough, but it could be even more.

 

[tdv2]

I think the max tax rate on qualified dividends and LT capital gains is something like 23.8% if one's income is high enough, but it could be even more.

Thanks for clarifying....didn’t realize that.....I was under the impression it maxed out at 15%.

 

[audreyh1]

I think the max tax rate on qualified dividends and LT capital gains is something like 23.8% if one's income is high enough, but it could be even more.

That's it. The 3.8% NIIT kicks in at $250K AGI for MFJ on cap gains income increasing the total tax rate to 18.8%, and the cap gains rate goes up to 20% at AGI ~$470K for MFJ. Thus you are paying 23.8% on capital gains for total taxable income above ~$470K. That's the top rate.

 

[mathjak107]

the problem with hitting that top rate is not only the 23.8% capital gains tax but it usually also triggers the amt as well as a 600 per month adder in medicare premiums for a couple .

i know , i did that in 2014 when we sold an appreciated asset and picked such a bad time to do it . it was really a sale out of our control but it was a terrible time to sell .

we could have had a 15% capital gains rate and no premium increases if it was sold a year earlier .

 

[VanWinkle]

I didn't think that capital gains or growth would be taxed in my traditional Ira until I received distributions. Is that incorrect? I won't be 59.5 for 11.5 years.

That is correct, they will not be taxed until you take a distribution from the account. Then they will be taxed as regular income at the tax rate of your income brkt. It will likely be higher than the tax you would pay on capital gains in a taxable account. If your asset allocation requires you to keep equities in you tax deferred accounts, so be it. Do not let the tax consideration form your asset allocation.

My IRA is 17% stock and 83% bonds to keep my asset allocation at 50/50.

VW