Question 18 Reading 10

[Galli]

Question asks which of the following assets would be most appropriate to locate in a tax deferred account in a Heavy Interest Tax Regime:
A) Low dividend paying stock
B) Tax exmpt bonds
C) Taxable Bonds
Answer is C
Intuitavely that answer seems wrong. I would think if you were deferring taxes (immediate benefit now) you would also want to choose tax exmpt bonds that way when taxes are due you end up not paying taxes on the interest you’ve accumulated over the years.
Am I missing something?

 

[ink]

Taxable bonds have the highest tax drag, so it makes sense for them to be put in a tax deffered account. If you put them there, you don’t have to pay taxes anually.
Tax exempt bonds. The interest payment for tax exempt bonds is not taxed, so there is no benefit in putting them in taxable accounts. They will earn the same return in both taxable or non-taxable accounts.

 

[cpk123]

tax exempt bonds - it does not matter - whatever be the tax regime. So answer is eliminated.
dividend paying stocks would be affected by tax on income (dividends) - no impact.
that leaves taxable bonds - pay interest - heavy interest tax regime - highest impact.
can arrive at answer by process of elimination here.

 

[magicskyfairy]

The thing that is taxed most aggressively is the thing that should be deferred. In a Heavy Interest Tax Regime, you’ll get taxed aggressively on Interest. You don’t want to be taxed aggressively on interest - you want to delay the taxes you have to pay on that since they suck, so you put it in a deferred account so that the tax man cant get his grubby hands on your sweet sweet interest income.