Originally Posted by gamboolman
My wife and I are nearing retirement and have a question on income taxes on our Vanguard Wellington account.
We have a basic simple question. We did try to search and find the answer - but No Joy. We are not very knowledgeable regarding finances or computers.... - but we are reading up and learning.
We know that we pay income tax on interest gained each year - the 1099 form we get each year.
Our question is regarding if we pull some of the principal out for expenses. The initial investment was made with monies that had been taxed and we have paid taxes each year on interest gained....So would we have to pay tax on the principal withdrawn?
Thanks for the help and assistance.
Gamboolman & Gamboolgal...
When you originally invested, you purchased shares at a certain price. Your reinvestment of interest/dividends does not affect the original purchase (unless some of your distributions were return of principal). Each reinvestment is viewed as if you received the distribution, resulting in income for you, and then purchased more shares at whatever the price was on the date of reinvestment.
As mentioned in another post, you could elect to take the average cost of all shares when selling, or specifically identify which shares and purchase date/price you are selling.