Mutual Fund Distributions & Taxes

[SoReady]

Hi,

For the past 3-4 years we have been able to live off of our after tax monies. These funds are now getting low enough that I need to reach into my IRA/401k buckets.

When I did a recent review of my holdings I realized that it throws off dividends and capital gains. Given I never really needed to report those previously I didn't pay much attention to them.

What I am wondering at this point from a tax perspective is if I have the dividends put in to the "sweep" account and paid top me quarterly (or monthly), is this just considered ordinary income, or is it reported somehow as dividends (qualified and ordinary)? The same question would pertain to any capital gains as well.

If it is reported as dividends/capital gains and I stay below the 15% bracket does it get taxed differently?


TIA,

Bob D

 

[GrayHare]

When I did a recent review of my holdings I realized that it throws off dividends and capital gains. Given I never really needed to report those previously I didn't pay much attention to them.

You'd better have been reporting those dividends because if you haven't you can have a large tax bill with penalties ahead of you. Tax on dividends and captial gains is payable for the tax year in which they are received.

 

[braumeister]

What I am wondering at this point from a tax perspective is if I have the dividends put in to the "sweep" account and paid top me quarterly (or monthly), is this just considered ordinary income

Yes. Anything coming out of a Trad IRA is considered ordinary income, no matter what its source.

 

[SoReady]

The dividends/capital gains I mention above are in my retirement accounts. I don't believe I need to report those, but I do keep the 5498 forms.

My question is regarding receiving dividends from the retirement funds I have and if they are considered ordinary income or not.

 

[SoReady]

Yes. Anything coming out of a Trad IRA is considered ordinary income, no matter what its source.

Thanks. That makes it pretty straightforward!

 

[Sunset]

Yes. Anything coming out of a Trad IRA is considered ordinary income, no matter what its source.

+++++++++++++++++++

Similar for 401K for almost everthing, but there is a rare exception if you have company stock you can take it out in a special way so that the gain is treated as capital gain, but not common, sometimes not worth it.

 

[Sunset]

You'd better have been reporting those dividends because if you haven't you can have a large tax bill with penalties ahead of you. Tax on dividends and captial gains is payable for the tax year in which they are received.

Unless they are in an IRA/401K/Roth...

 

[GrayHare]

The dividends/capital gains I mention above are in my retirement accounts. I don't believe I need to report those, but I do keep the 5498 forms.

Aha, then yes, no reporting needed until withdrawal. Upon withdrawal those do not get the usually lower dividend and cap gain rates but rather are taxed at the typically higher ordinary income rate, even if the dollars you withdraw came from divs and CGs.

 

[bingybear]

can you remove $ from your 401k/tira without penalty? are you 59.5 or do you qualify for rule 55 with the 401k? If not, you may need to pay a penalty (10%) for early withdraws. As others noted, with few exceptions TIRA and T401k distributions will be taxed as ordinary income (non-earned).

 

[Rustward]

Yes. Anything coming out of a Trad IRA is considered ordinary income, no matter what its source.

True when all contributions were tax deductible, but, it is possible to make after tax contributions to a 401K or IRA, and the sum of those contributions is referred to as basis. The basis portion of a distribution is not taxed.

It is uncommon for an IRA to have nonzero basis, but there are two such IRAs here.

 

[bingybear]

True when all contributions were tax deductible, but, it is possible to make after tax contributions to a 401K or IRA, and the sum of those contributions is referred to as basis. The basis portion of a distribution is not taxed.

It is uncommon for an IRA to have nonzero basis, but there are two such IRAs here.

Yes it true and I have one with a non-zero basis. But you have to withdraw pro rata. Even with some tax basis, the percentage of the basis usually would be so small that it makes little difference in practice. Especially for planning purposes.

 

[Sunset]

Yes it true and I have one with a non-zero basis. But you have to withdraw pro rata. Even with some tax basis, the percentage of the basis usually would be so small that it makes little difference in practice. Especially for planning purposes.

Right, isn't that so annoying.

Here is an idea to simplify the tax code, if you have a non-zero basis of $25,000 (or less), then the first $25,000 (or non-zero basis amount if less) taken out is tax free.
After that all taken out is taxable.

That way we won't have to calculate every year until we die or empty out the IRA the amount that is tax free vs taxable.

 

[bada bing]

Right, isn't that so annoying.

Here is an idea to simplify the tax code, if you have a non-zero basis of $25,000 (or less), then the first $25,000 (or non-zero basis amount if less) taken out is tax free.
After that all taken out is taxable.

That way we won't have to calculate every year until we die or empty out the IRA the amount that is tax free vs taxable.

That idea is especially relevant given that the IRS has pretty much
capitulated on unrestricted roll overs to Roth of after tax basis. Only
roadblock that remains is pro-rata calculations, which is pretty easy to get
around by rolling pre-tax balances into a qualified (i.e. 401K type) plans. I
don't understand why the IRS is so flexible in some respects and so
convoluted in others. I sort of expected the IRS blessing of backdoor and
mega backdoor Roths was a prelude to getting rid of the cumbersome pro-
rata nonsense, but that step hasn't happened so far.

 

[bingybear]

Right, isn't that so annoying.

Here is an idea to simplify the tax code, if you have a non-zero basis of $25,000 (or less), then the first $25,000 (or non-zero basis amount if less) taken out is tax free.
After that all taken out is taxable.

That way we won't have to calculate every year until we die or empty out the IRA the amount that is tax free vs taxable.

both of us have a bit over $30k... I would like to get all that credited. Very early on (before Roth anything) and when 401k limits were small, we had an employer that allowed extra after tax contributions. When we changed jobs (dot bust) we rolled the 401.. again, before you could roll out roths.

we don't have 401k's any more. so no rolling back and forth. It would be nice and likely more fair if we could roll it into a roth tax free (non-zero basis part at least.

 

[sengsational]

Here is an idea to simplify the tax code, if you have a non-zero basis of $25,000 (or less), then the first $25,000 (or non-zero basis amount if less) taken out is tax free.
After that all taken out is taxable.

If they "simplify", it's more likely would be they make it like 408(b) contracts, where ALL the gains have to come out before the basis!

 

[Texas Proud]

+++++++++++++++++++

Similar for 401K for almost everthing, but there is a rare exception if you have company stock you can take it out in a special way so that the gain is treated as capital gain, but not common, sometimes not worth it.

But sometimes it is.... I probably have $170K or so in gains I can transition from IRA and also defer.... I have been planning this for 15 years...

 

[bw5972]

Yes. Anything coming out of a Trad IRA is considered ordinary income, no matter what its source.

+1

 

[bingybear]

Originally Posted by braumeister
Yes. Anything coming out of a Trad IRA is considered ordinary income, no matter what its source.

+1

The prorated portion distributed from an IRA will not be taxed like ordinary income. At least it is excluded when I do roth conversions.