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LIFO withdrawls - always best ? 401K and IRA too ?
Old 01-28-2007, 07:04 AM   #1
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LIFO withdrawls - always best ? 401K and IRA too ?

I'm in accumulation phase with buy-and-hold approach - so I have done very little "selling" so far.

Should all accounts, taxable, 401K, IRA be set up for "specific lots" accounting and not "average cost" accounting ?

For 401K, can you do LIFO as you pull money out ? So the most recent contributions and associated gains would come out first ? I'm assuming then the gain is taxed as income and the contribution not taxed.

Looking at Megacorp's 401K website, I can't find any tools / designations on accounting - just shows "total cost".

Thanks !
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Re: LIFO withdrawls - always best ? 401K and IRA too ?
Old 01-28-2007, 07:19 AM   #2
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Re: LIFO withdrawls - always best ? 401K and IRA too ?

I have never made an after-tax contribution to my 401(k), hence all money taken out would be taxed the same way as ordinary income (and not just the gains). Thus, LIFO, FIFO, etc does not make sense for a 401(k).

For a traditional IRA, if you have only before-tax contributions, then the entire withdrawal is taxed as ordinary income as tax. If you have after-tax and before-tax contributions, you should have file form 8606 with the IRS to indicate the amount of after-tax contributions you made. Then when you withdrawal, a pro-rata proportion of the withdrawal is considered to come from your after-tax contribution and you do not pay taxes on it. Thus, once again there is no LIFO, FIFO whatever allowed. Basically you don't have choice.

I think our friend nords occassionally writes of the hassles of figuring out the tax situation of his FIL's IRA withdrawals in the situation of after- and before- tax contributions. The moral of his story to me: Do not make after-tax contributions to a traditional IRA. But others may get a different moral.
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Re: LIFO withdrawls - always best ? 401K and IRA too ?
Old 01-28-2007, 03:20 PM   #3
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Re: LIFO withdrawls - always best ? 401K and IRA too ?

Virtually all money withdrawn from a 401K is taxed, so there is no need to keep track of basis.

AFAIK, the only exception is if you maxed out the 401K and Megacorp set up a way of contributing after-tax contribution. In that case the contribution can be withdrawn tax-free but all gains are taxable, so the only thing you have to keep track of is how much money you put in.

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Re: LIFO withdrawls - always best ? 401K and IRA too ?
Old 01-28-2007, 11:28 PM   #4
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Re: LIFO withdrawls - always best ? 401K and IRA too ?

Quote:
Originally Posted by clifp
Virtually all money withdrawn from a 401K is taxed, so there is no need to keep track of basis.

AFAIK, the only exception is if you maxed out the 401K and Megacorp set up a way of contributing after-tax contribution. In that case the contribution can be withdrawn tax-free but all gains are taxable, so the only thing you have to keep track of is how much money you put in.
I've had this situation and its even simpler than that. The after tax contributions come out "tax free" while the gains and company match are taxed as income when they come out.......nothing to keep track of. The problem is that the pre-tax and after-tax contributions are intermixed so you cannot get at one or the other individually. A withdrawal comes out according to some prorated formula. For me it was a matter of pulling enough in total to get all of the after tax out. I did a rollover (permitted by my 401k) and put the pre-tax into an IRA and the after tax came to me "tax free". I will avoid intermixing pre-tax and after tax at all costs in the future. Fidelity manages our 401k and they have a section called "Contribution Summary" that identifies the source (pre-tax vs. after tax) of all contributions
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