The curriculum states that it is generally more appropriate to place bonds in TDAs and equity in taxable accounts. Could anyone expand on this thought or provide an example? I am struggling to understand this concept as it seems the higher yielding equity would be better off growing in a tax deferred account. Thanks.
My understanding is the income component of bonds realizes an active benefit of deferring taxes in a TDA while equity gains are typically deferred regardless of account type because they are unrealized.
Interest income is usually taxed at a higher rate than capital gains, and capital gains can be deferred until a position is sold, so assuming this is the case, it is generally better to place your returns that are taxed at a higher rate in a TDA and your returns that are taxed at a lower rate in a taxable account. All of this depends on the specifics of a particular tax regime of course, and how much equity trading is taking place. If you’re doing a lot of trading spinning off a lot of capital gains, particularly short term capital gains, it would likely be better to do that in a TDA and hold your bonds in a taxable account instead.
Dividends tend to be taxed at a lower rate than interest income as well.
Tax loss harvesting usually more frequently used with equities especially if you use HIFO approach.
This is confusing to me too. I also read that Bonds should go to TDA and Equities to TEA (Tax-exempt accounts). This contradicts with “more appropriate to place bonds in TDAs and equity in taxable accounts”
^ Because it is primarily depending on Tax system (taxation of dividends, interests and capital gains) and if subject has accumulated unrealized losses.
Consider, there are Tax systems in some countries with no dividend and capital gain taxes at all while interests are taxed regularly. Why one should hold equities in tax exempt account?