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Posted by John on May 7, 2007, 1:09 pm
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If you invest in a mutual fund that is a bond fund that is
inside your 401k - do you benefit from not paying taxes on
the coupons of the bond? I mean how are you treated as a
fund holder differently than someone that invests in the
fund but owns the fund outside of their 401k.
I'm trying to realize what the tax advantage is (if any) to
holding a bond mutual fund in a 401k.
Thanks.
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Posted by Bill on May 8, 2007, 12:52 am
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qjohnny2000@yahoo.com (John) posted:
> If you invest in a mutual fund that is a bond
> fund that is inside your 401k - do you benefit
> from not paying taxes on the coupons of the
> bond? I mean how are you treated as a fund
> holder differently than someone that invests in
> the fund but owns the fund outside of their
> 401k.
The bond fund would be an investment within the 401k, which
is sheltered from current taxation. That is the sole extent
of the benefit.
> I'm trying to realize what the tax advantage is
> (if any) to holding a bond mutual fund in a
> 401k.
I _think_ the answer would be clear, if you had bought a
bond fund circa 1980 when the prime nudged 20% and tax-free
municipals were yielding 12%. Those funds which had
acquired non-callable bonds -- such as 30-year US Treasuries
at > 9% -- enjoyed a huge increase in value.
Of course, the LT capital gains advantage wouldn't apply to
distributions from the 401k (or its successor, likely a
rollover traditional IRA), but it would still add a great
deal of value.
Today's bond yields don't seem to allow for that kind of
satisfaction -- but I suppose when Japan's official rate
went to -0-, _all_ Japanese bonds benefited ... so anything
is possible.
Bill
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
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<< The Charter and the Guidelines for submitting posts >>
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<< Copyright (2006) - All rights reserved. >>
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Posted by Phil Marti on May 8, 2007, 12:52 am
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> If you invest in a mutual fund that is a bond fund that is
> inside your 401k - do you benefit from not paying taxes on
> the coupons of the bond? I mean how are you treated as a
> fund holder differently than someone that invests in the
> fund but owns the fund outside of their 401k.
When you own the fund in a taxable account you pay tax when
the interest is distributed from the fund. When you own it
in a retirement account, you don't pay until you withdraw
the funds in retirement.
> I'm trying to realize what the tax advantage is (if any) to
> holding a bond mutual fund in a 401k.
There is no advantage other than the above. What you want
to be careful of is investing within a retirement account in
funds that hold tax-exempt bonds. That has the effect of
turning non-taxable interest into taxable income.
--
Phil Marti
Clarksburg, MD
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ------------------------------------------------------- >>
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Posted by MyVeryOwnSelf on May 8, 2007, 12:52 am
Please log in for more thread options > If you invest in a mutual fund that is a bond fund that is
> inside your 401k - do you benefit from not paying taxes on
> the coupons of the bond? I mean how are you treated as a
> fund holder differently than someone that invests in the
> fund but owns the fund outside of their 401k.
The benefit is that federal income tax is deferred until you
ultimately take distributions from the 401K. This way, extra
earnings can accumulate by earning earnings on what would've
gone to the IRS a lot sooner.
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ------------------------------------------------------- >>
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Posted by Barry Margolin on May 8, 2007, 12:52 am
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> If you invest in a mutual fund that is a bond fund that is
> inside your 401k - do you benefit from not paying taxes on
> the coupons of the bond? I mean how are you treated as a
> fund holder differently than someone that invests in the
> fund but owns the fund outside of their 401k.
>
> I'm trying to realize what the tax advantage is (if any) to
> holding a bond mutual fund in a 401k.
You never pay taxes on securities held within a 401k or IRA.
The earnings are accumulated in the retirement account (in
the case of a 401k, I've never been given the option to do
anything other than automatically reinvest them, although
this is immaterial to this discussion). You pay taxes when
you ultimately withdraw from the account (except for Roth
IRAs).
So the tax advantage is that the taxes are *deferred*. This
allows you to reinvest more of the earnings, so it compounds
more. And if you're in a lower tax bracket when you
withdraw, you pay less taxes in the long run.
--
Barry Margolin, barmar@alum.mit.edu
Arlington, MA
*** PLEASE don't copy me on replies, I'll read them in the group ***
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ------------------------------------------------------- >>
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