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Author: blearynet Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121095  
Subject: Where to hold GNMA fund Date: 12/15/2006 6:40 PM
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We have had a Vanguard GNMA fund for about 6 years, and it is in a taxable account. From what I have read, this is dumb, and it should be in a non-taxable account (IRA). Is this correct? If it is relevant, we are in the 28% fed tax bracket, and 9.3% state income tax bracket. Thanks in advance!
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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 90012 of 121095
Subject: Re: Where to hold GNMA fund Date: 12/15/2006 6:46 PM
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When you take money out of your IRA at retirement time, if it is a Roth it won't be taxed, if traditional will be taxed as ordinary income no matter what was the source of the money.
Assuming you own some combination of stocks that pay dividends and bonds that pay interest, dividends are taxed at a favorable rate. Therefore, it is well to fill your IRA with items that pay interest or otherwise lots of income that would otherwise be taxable, and have your dividends that are taxed at a lower rate in taxable accounts. You also may have more tendency to buy and sell stocks, and the capital gains are taxed at a favorable rate if in taxable accounts.
Best wishes, Chris

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Author: CABob Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 90018 of 121095
Subject: Re: Where to hold GNMA fund Date: 12/15/2006 11:04 PM
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I agree with Chris but stated in another way --
It depends to an extent on what other investments you have and what other accounts you have to put the investments. It may also depend on whether you are in the accumulation phase or in the withdrawal phase.
Generally you should looks at your investments and rank them in order of tax efficiency and place the most tax inefficient items in your tax deferred accounts and the most tax efficient ones in the taxable accounts. In the middle are non taxable accounts or Roth IRAs.
A tax inefficient investment is one that has distributions that would be taxed at ordinary income tax rates. These would include most bond funds. Tax efficient investments are those that produce distributions at tax favored rates. These would include equities and equity funds especially broad based index funds since the distributions are usually long term capital gains and qualified dividends.
Without knowing more about your portfolio it is difficult to say specifically, but, in general a GNMA fund is more appropriate to a tax deferred account.
If you are in the withdrawal phase and are spending the distributions it makes this less of an issue since withdrawals from a tax deferred account will be taxable at ordinary income tax rates anyway.

Bob

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 90025 of 121095
Subject: Re: Where to hold GNMA fund Date: 12/16/2006 10:42 AM
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Crosenfield: "When you take money out of your IRA at retirement time, if it is a Roth it won't be taxed, if traditional will be taxed as ordinary income no matter what was the source of the money."

I dislike disagreeing with Chris, but a traditional IRA can have basis, in which case only a portion of the withdrawal may be taxable.

Regards, JAFO



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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 90031 of 121095
Subject: Re: Where to hold GNMA fund Date: 12/16/2006 3:41 PM
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"but a traditional IRA can have basis, in which case only a portion of the withdrawal may be taxable."

Correct. But the taxable portion will be taxed as ordinary income.

I can't figure any way the basis could ever be 100%, unless the investments in the IRA had generated nothing...or figuring in capital losses, there had been no return over the years and the IRA had been funded with after-tax income.

Putting all the after-tax money into the same IRA doesn't solve anything either, as required withdrawals are calculated based on ALL your IRAs...

Best wishes, Chris

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Author: blearynet Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 90036 of 121095
Subject: Re: Where to hold GNMA fund Date: 12/16/2006 9:15 PM
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We are in the accumulation phase, and will continue to be there for 7 more years. So it sounds like it would be wise to sell the GNMA in the taxable account, and move it to the tax-deferred account. (We are not eligible for a ROTH IRA). I will have to check the amount of capital gains to be paid, if we sell the fund in the taxable account, but my guess is that it would make sense to sell it.

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