Tax-free municipal bonds in a taxable account

CFA Level III
#1

Could someone explain why yield concession is a significant disadvantage to placing low yielding tax-free municipal bonds in a taxable account and equity in a TDA? Quoted from Textbook Vol 2, P199. “This yield concession is a significant disadvantage to placing low yielding tax-free bonds in a taxable account and equity in a TDA. In most instances the yield concession more than offsets the value of sheltering equity returns from taxes. As a result, it is generally better to follow the general strategy of locating bonds in TDAs and equity in taxable accounts.” Thanks

#2

you don’t sell equity and hold it for long term so keep that in taxable account as there will be no capital gains because you are not selling it and hence no taxes. Bonds usually pay coupon and it will be taxable so if you keep bond in taxable account, you will have to pay taxes so keep bonds in Tax deferred account. It’s about the time to go to bed and I am not sure what I am typing…hopefully it is making sense to you.

#3

Thanks but are we assuming equity are non dividend paying ? otherwise dividend from equity may be higher than coupon of municipal bonds given the text say municipal bonds are low yielding. Not urgent, hope you have a good sleep.

#4

coupons are higher than dividends most of the times.

#5

The text say some jurisdictions exempt municipal bond interest. Then why place tax fee municipal bonds in TDA ?

#6

In that case, Tax free muni bonds should reside in Taxable accounts.

#7

But the text P.199 say there is significant disadvantage to placing low yielding tax-free municipal bonds in a taxable account and equity in a TDA. As a result, it is generally better to follow the general strategy of locating bonds in TDAs and equity in taxable accounts. I don’t understand why they suggest placing tax fee municipal bonds in TDA and what is the disadvantage of placing it in taxable account.