Is Placing LTTs in a Tax-Deferred Account Really a Good Idea?

[cnh]

In a several threads, there's discussion of the advantages of placing LTT's in a tax-deferred account.  I'm wondering, though, if anybody's analyzed this from the perspective of state and local income tax liability.  Income and gains from LTTs in a regular taxable account incur the federal tax liablity, but no state or local tax liability as I understand it.  You pay the Feds and you're done.  LTTs in a tax-deferred account incur no current tax liability, but upon distribution in retirement they're going to incur the federal tax liability (hopefully at a lower rate, but who knows) and the state and local tax liability, aren't they?  Either that, or it seems like there will be an accounting nightmare to sort things out and exempt selected distributions from state and local tax liability.

Please forgive me if this has been discussed (and maybe point me in the right direction), but any thoughts on this?

[Xan]

Why would you live in a state that taxes your income?

[dualstow]

Hi cnh,

I live in a taxy state and I have some bonds in both taxable and deferred.

Income and gains from LTTs in a regular taxable account incur the federal tax liablity, but no state or local tax liability as I understand it.  You pay the Feds and you're done.

This is true.
One negative, though is that bonds are taxed differently than stocks. I don't know if this makes a difference to you, but I'm used to having qualified stock dividends in taxable. I have a lot of them, but so far my income is low enough that I pay $0 on them to the feds.

Until 2012, I kept bonds in deferred per the conventional wisdom, but I simply ran out of room. Not wanting to alter the pp, I bought some long bonds in taxable.  I believe bond profits are taxed at the max whether they are from a sale or interest. I'm sure most members here know. Otherwise, I have my new tax return laying around so I can check tomorrow at the latest.

Oh, also, I think the interest on treasuries does affect what I pay for school tax or some other specific city tax where I live, though it doesn't affect any other local taxes.

[WildAboutHarry]

I believe bond profits are taxed at the max whether they are from a sale or interest.

Capital gains are capital gains and are taxed the same for bonds (but not for gold!).

And that is one reason why taxable space might not be a bad idea for long bonds.  If rates ever do rise, you at least have the luxury of realizing a loss on long-bond sales.

[dualstow]

I believe bond profits are taxed at the max whether they are from a sale or interest.

Capital gains are capital gains and are taxed the same for bonds (but not for gold!).

I have some on my tax return right now --- admittedly not treasuries, though -- that are reported as interest income despite the fact that it was a sale. (I didn't elect to sell the bond myself, but one entity took over another and ... no more bond for me).  I don't know why this is the case, since investopedia says exactly what WAH says:

Capital Gains
Regardless of the type of bonds that are sold, any debt issue that is traded in the secondary market will post either a capital gain or loss, depending on the price at which the bonds were bought and sold. This includes government and municipal issues as well as corporate debt. Gains and losses on bond transactions are reported the same as with any other type of security, such as stocks or mutual funds, for the purposes of capital gains.

src: http://www.investopedia.com/articles/ta ... nd-tax.asp

In any case, I'm very glad to know that it won't be the case for treasuries. (Have never sold them).

So the interest is the expensive part, taxwise?

[sophie]

Yes, bond (like cash) interest is taxed as ordinary income on the federal level.  It is exempt from state and local taxes.  When you sell the bond, any gain or loss will be treated as capital gains (or losses), just like a stock position.

Bonds are the probably the best candidate for tax-deferred accounts right now, but you might want to keep some of them in taxable so that you can harvest the losses when the interest rates go up.