Has anyone converted their interest income to QDI?

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restingonmylaurels
Posts: 90
Joined: Tue Apr 14, 2015 11:02 am

Has anyone converted their interest income to QDI?

Post by restingonmylaurels » Sat Aug 12, 2017 6:02 am

Interest income earned from CDs and bond funds is taxed at progressive federal rates while dividend income from stocks is not taxed or is taxed at a (mostly) flat rate if qualified dividend income (QDI).

All things being equal, it would be preferable to receive one’s income distributions from stocks instead of bonds/CDs but that does of course have implications for asset allocation and risk tolerance.

I am wondering if anyone on the forum has made a concerted effort to switch at least part of their holdings from bonds to dividend-paying stocks to deal with this tax treatment difference?

Dandy
Posts: 4633
Joined: Sun Apr 25, 2010 7:42 pm

Re: Has anyone converted their interest income to QDI?

Post by Dandy » Sat Aug 12, 2017 6:11 am

The equity risk potential seems to out weigh the tax benefit. An intermediate bond fund may lose 5% if interest rates rise 1%. An equity position might lose many times that? Is the risk of equity principal loss worth the better tax of equity dividends vs bond dividends?

abner kravitz
Posts: 182
Joined: Tue May 05, 2015 7:42 am
Location: Beaufort County, SC

Re: Has anyone converted their interest income to QDI?

Post by abner kravitz » Sat Aug 12, 2017 6:21 am

One way to deal with the differing tax treatment is to allocate more bonds in tax-advantaged accounts and tilt towards equities in taxable. Whether or not a preference to dividend paying stocks is the way to go for the equity portion is another issue, sure to cause much debate.

livesoft
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Re: Has anyone converted their interest income to QDI?

Post by livesoft » Sat Aug 12, 2017 7:01 am

It is much easier to simply avoid getting paid any taxable interest income and any taxable non-qualified dividend income. That's what we do.
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The Wizard
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Re: Has anyone converted their interest income to QDI?

Post by The Wizard » Sat Aug 12, 2017 7:04 am

We're talking about taxable investment/savings accounts here and yes, I'm doing exactly what the OP suggests.
Interest is taxed at 28% for me, qualified dividends at 15%.
So a while ago I decided to put excess retirement (in my case) income into the total stock market fund, no more savings account.
Part of this money is targeted as a New Car Fund and if I end up taking a tax loss when I cash out certain lots, that's okay...
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