[jgalt212]

Yes, but taxes on capital gains are much, much lower than taxes on interest. You probably need bond yields to be about 10-12% to be tax equivalent to equities returns.

Using your 401K, you can create tax equivalency between stock and bond returns. But then that creates perverse outcome of putting shorter duration / lower risk assets in your longer duration savings account. Thanks Washington!

[ac29]

> Yes, but taxes on capital gains are much, much lower than taxes on interest.

Not true in California: Capital gains are taxed at normal income rates, and treasury interest is state tax exempt.

For the hypothetical taxpayer earning $100k/year:

Long term capital gains: 15% federal + 9.3% state = 24.3% total tax

Treasury interest: 24% federal + 0% state = 24% total tax

[tempsy]

It will depend on whether you have other income or not (eg retired or not).

If you don’t have other income the first 45k if single or $90k if married of long term cap gains will be taxed at 0%.

In that case your effective tax rate in CA is around 12% if you’re single or only 2.7% if married, which is going to be a lot lower than any income that is taxed as ordinary income.

[PopAlongKid]

You are tossing together several unrelated things here, not sure why.

-federal zero L/T cap gains rate if taxable in come is low enough -- this has zero relevance to CA tax

-different thresholds depending on filing single or married-joint (previous example was for single filer)

-CA "effective" tax rate - while there is no single definition of this, it is clear that no one with an AGI of $100K has anywhere near a CA effective rate of 12%.

[tempsy]

I meant overall tax rate for someone based in California...

You are making some case that because California doesn't treat long term capital gains differently that it doesn't make much difference if you were taxed from realizing LTCG or ordinary income in California and your overall tax burden (federal + state) would be about the same.

I'm just pointing out if you're retired, you would naturally have a much lower tax burden if you realized LTCG vs $100k in ordinary income because the federal tax rate for LTCG would be so low for someone with no other income.

[toomuchtodo]

Fixed income with qualified dividends somewhat avoids this tax drag.

EDIT: Retracted, I'm mistaken, qualified dividends only apply to returns from a US corporation or a qualified foreign corporation. You would need to build a ladder with a holding period sufficient to realize LTCG rates from a fixed income product.

[tempsy]

What is an example of "fixed income with qualified dividends"?

Interest received from treasuries are taxed like ordinary income. The only special tax benefit is interest income is exempt from state income taxes.

[toomuchtodo]

Comment I replied to used the word "bonds", not "treasuries".

[tempsy]

Which bonds would that include?

"Qualified dividends" is a term used to describe dividends received from equities. It's not a term related to fixed income unless I'm missing something.

There are things like municipal bonds that are tax exempt, but the yield is usually lower.