Minimize Use of Taxable Bonds
Like equities, taxable bonds produce capital gains every time the fund manager buys or sells securities, as this Fidelity article makes clear.
Minimize Use of Taxable Bonds
Like equities, taxable bonds produce capital gains every time the fund manager buys or sells securities, as this Fidelity article makes clear. You may also have to pay taxes on your gains when you sell your shares in the bond.
This is why, as this Investopedia article explains, taxable bond funds tend to be a bad deal b specifically for high net worth investors. Because you pay at the highest tax rate, you stand to gain a greater tax reduction by focusing instead on municipal bonds. Dividends from municipal bonds are not charged with federal taxes, and they often incur no state taxes either.
In general, the higher your tax bracket, the worse taxable bonds become as an investment vehicle.
This is one reason why you can’t just look at the annual average rate of return when selecting a bond fund, because those are pre-tax returns. A taxable bond with a 5% performance is probably a worse deal than a municipal bond with a 2.5% return b especially for high net worth investors in high tax states like California.