The Money Mustache Community
Learning, Sharing, and Teaching => Taxes => Topic started by: rokel on July 02, 2020, 07:46:31 AM
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I made a mistake when I started out and I purchased a lot of bond index funds in a taxable account. Now I know I should have purchased them in my retirement accounts. I am trying to right things moving forward, but what do I do with the bonds I already own? Sell them all at once and put them in a stock index? I worry about the tax implications of doing that, but doing nothing means I've been paying a lot of tax on the dividends earned.
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Not sure why bonds would be so much better in a retirement account. How much unrealized gains do you have in the bonds? How long ago did you buy into them, more than 1 year?
The interest off bonds will be taxed at long term gains rate once you have held them for a year which could be better than growing inside a pre-tax retirement account. Why do you feel you need bonds anyway instead of ETF stock funds?
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EricEng - I don't believe bond income is a capital gain, but is instead always taxed at ordinary income tax rates. Could you be confusing bonds with how stock dividends are treated?
@rokel - Have you visited your brokerage account's "cost basis" page? Look for your bond index fund there, under "unrealized capital gains". That's money you could be taxed on if you sold. That should tell you the tax impact of selling the bonds - the gain you will report on your taxes if you sell.
Another approach is to sell the taxable bonds, but purchase "tax-exempt" bonds. I prefer ETFs, so I like "Vanguard Tax-Exempt Bond ETF" (VTEB), which pays interest that is exempt from Federal (IRS) taxes (but you pay state tax on the interest).
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EricEng - I don't believe bond income is a capital gain, but is instead always taxed at ordinary income tax rates. Could you be confusing bonds with how stock dividends are treated?
Most US corporate bond funds are putting out qualified dividends which will be taxed at capital gains rate if held long enough.
https://www.investopedia.com/terms/q/qualifieddividend.asp
You can also go municipal bonds and pay no federal tax, although I don't find the returns to be good enough even with the tax savings.
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EricEng - I don't believe bond income is a capital gain, but is instead always taxed at ordinary income tax rates. Could you be confusing bonds with how stock dividends are treated?
Most US corporate bond funds are putting out qualified dividends which will be taxed at capital gains rate if held long enough.
Can you point to an example of this? All the bond funds I see on Vanguard's list (https://advisors.vanguard.com/VGApp/iip/advisor/csa/investments/taxcenter/yearendfigures) pay no qualified dividends.
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EricEng - I don't believe bond income is a capital gain, but is instead always taxed at ordinary income tax rates. Could you be confusing bonds with how stock dividends are treated?
Most US corporate bond funds are putting out qualified dividends which will be taxed at capital gains rate if held long enough.
https://www.investopedia.com/terms/q/qualifieddividend.asp
You can also go municipal bonds and pay no federal tax, although I don't find the returns to be good enough even with the tax savings.
From the page you linked to:
"Dividend tax rates for ordinary dividends (typically those that are paid out from most common or preferred stocks)"
Isn't that more evidence for what I'm saying? That only stocks pay qualified dividends?
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I keep a small amount of VBTLX ($12,000) in my taxable account for my emergency fund. Yes the dividends are taxed at my ordinary rate but the money is easily accessible and I make more interest overall compared to keeping it in cash.