Personal Investments • Bonds in Taxable Question

With this in mind, permit me to propose a syllogism:

1. Bonds in taxable accounts are not advised.
2. An exception to this rule is munis for people in higher tax brackets.
3. Muni returns in higher tax brackets are similar to regular bond/bond fund returns for people in 22-25% tax bracket or lower.

Ergo, holding regular bonds or bond funds in taxable accounts for people in the 22-25% tax bracket can be recommended, considering the yield is similar to munis in taxable accounts for those in high tax brackets.

The reason this breaks is that stocks have a higher tax cost in high tax brackets. In the 22-24% tax brackets, qualified dividends and long-term capital gains are usually taxed at 15%. In higher tax brackets, qualified dividends and long-term capital gains are usually taxed at 18.8% or 23.8%. Since munis have the same tax cost regardless of your bracket (the difference between muni and taxable bond yields on bonds of comparable risk), it can make sense to hold stocks in taxable in lower brackets, and munis in higher brackets.

At current yields, I don't even recommend munis in taxable for investors who pay 18.8% tax on qualified dividends. I do recommend them for investors who pay 23.8% tax, or those who can use a low-cost muni fund for their high-tax state; a CA investor in a 9.3% CA tax bracket pays 28.1% tax on qualified dividends but no tax on CA munis.

Statistics: Posted by grabiner — Wed May 08, 2024 9:44 pm — Replies 7 — Views 657

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