Why only hold bonds in a nontaxable account

[RedHawk]

I've been reading here and other places that bonds should be held in a tax advantaged account. Why exactly is that? Is it because of the monthly dividends or something else? Bond funds don't fluctuate in price as much as stock funds so it seems like you wouldn't have to pay too much capital gains tax when it came time to sell if they were in a taxable account. Thanks

 

[audreyh1]

Because of the monthly (or quarterly) dividends. Bond dividends are taxed at your max income tax bracket.

Audrey

 

[JohnEyles]

Because of the monthly (or quarterly) dividends. Bond dividends are taxed at your max income tax bracket.

I believe the flip-side of this argument is so you have money available to hold your
equity allocation in taxable accounts. Which is advantageous because hopefully much
of the distributions will be capital gains distributions and qualified dividends, both taxed
at a much lower rate than ordinary income. And when you start liquidating these
equities for retirement spending, the capital gains also will be taxed at a very low rate.
If your equities are in a tax-deferred account, all this income will ultimately be taxed as
ordinary income.

Of course, with a Democratic congress, as well as the fact that eventually someone
must take responsibility for the deficits (Democrats or not), it's reasonable to suspect
this advantageous treatment may go away or at least be lessened. Most people here
don't seem to think that capital gains will ever be taxed as ordinary income, however.

It's an interesting thought experiment how the conventional wisdom (about what
assets to hold in which accounts) might change *IF* capital gains started getting
treated as ordinary income !

 

[ats5g]

By holding equities in taxable accounts, there may be more chances to tax loss harvest. Also, remember the stepped up basis that assets get when you pass them onto your heirs.

- Alec

 

[Gone4Good]

It's an interesting thought experiment how the conventional wisdom (about what
assets to hold in which accounts) might change *IF* capital gains started getting
treated as ordinary income !

You'd still want your income producing assets in a tax deferred account. Capital gains are tax deferred already.

 

[RedHawk]

Capital gains are tax deferred already

I never thought of it this way, but it is true for the most part.
I wrongly assumed that bond dividends were taxed at the lower rate. I learn a lot from this board.