Which investments should be sold first?

[FREE866]

Hi there.


I handle my moms account. She has an IRA which required by RMD she takes out ~$25,000 per year. She also has a personal taxable account. Stock portion is invested in ETF's and fixed income is split between CDs and Treasury Bills.


My question is she needs to withdraw ~$40,000 per year to meet expenses.


Should this be withdrawn from the IRA or the taxable?


Anyone have expertise or insight into this?


Thank you.

 

[RobbieB]

I'd mix it to avoid paying the next tax bracket.

 

[Fermion]

Does she have much basis in the IRA? That would change up things if she is taking out $25,000 but has a basis of 50% or something.

 

[GrayHare]

I'd mix it to avoid paying the next tax bracket.

Agreed.

 

[Sunset]

Doesn't she get SS ?

How old is she ?

 

[HI Bill]

With the available info, short answer is spend RMDs and dividends from taxable accounts first. For a better, tax-efficient answer, we need to know:

Annual spending
Age
Filing status
SS income
Pension income
Annual dividends from taxable account
Value of tax-deferred account
Value if brokerage account and % that are LTCGs
Any other income
Is the goal to minimize taxes now, or to leave the largest possible bequest?

 

[FREE866]

Doesn't she get SS ?

How old is she ?

She does get SS


she actually needs an additional 30K from these accounts not 40K


Shes 80

 

[FREE866]

Does she have much basis in the IRA? That would change up things if she is taking out $25,000 but has a basis of 50% or something.

I believe thats irelavent as money from an IRA is considered income....doesn't matter what she paid for the investments in the IRA

 

[FREE866]

With the available info, short answer is spend RMDs and dividends from taxable accounts first. For a better, tax-efficient answer, we need to know:

Annual spending
Age
Marital status
SS income
Pension income
Annual dividends from taxable account
Value of tax-deferred account
Value if brokerage account and % that are LTCGs
Any other income
Is the goal to minimize taxes now, or to leave the largest possible bequest?

Let me clarify....


Her all in spending needs for the year are 75K.
She gets 25K via the RMD
She gets 20 K via SS


so the ADDITIONAL she needs form the portfolio is 30 K not 40K..sorry about that...


she is on dividend reinvestment with all ETFs


my question is should I sell in the IRA or the taxable account for that 30K?


shes 80
single
500k in IRA and 500K in personal

 

[pb4uski]

As previously posted, does the tIRA have any basis or is the $25k RMD result in $25k of income? (that would be very common)

What is the taxable money invested in? And what is the basis? If it is in a taxable bank account then there are no tax implications of withdrawals, but if it is in stocks then there would be LTCG from sales to consider.

How old is your Mom? Does she take the standard deduction or itemize?

A key thing to know is her marginal tax rate after SS and RMDs and any other income she has, but before discretionary withdrawals like taxable account sales/redemptions or additional IRA wtihdrawals.

 

[pb4uski]

Doesn't she get SS ?

How old is she ?

I'm assuming over 70 since she is subject to RMDs.

 

[pb4uski]

....500K in personal

and what is basis? If she takes $10k from personal how much is the tax gain?

 

[Fermion]

I believe thats irelavent as money from an IRA is considered income....doesn't matter what she paid for the investments in the IRA

Not true. I have several IRAs that were non deductible (we made too much to take a deduction on the contribution). They have a basis which is not taxed when withdrawn and does not count toward income.

It is true that the stuff inside the IRA does not have a basis, but the IRA itself can have a basis.

 

[target2019]

Let me clarify....

Her all in spending needs for the year are 75K.
She gets 25K via the RMD
She gets 20 K via SS

so the ADDITIONAL she needs form the portfolio is 30 K not 40K..sorry about that...

she is on dividend reinvestment with all ETFs

my question is should I sell in the IRA or the taxable account for that 30K?

shes 80
single
500k in IRA and 500K in personal

How is the 500k in personal invested?

 

[FREE866]

Not true. I have several IRAs that were non deductible (we made too much to take a deduction on the contribution). They have a basis which is not taxed when withdrawn and does not count toward income.

It is true that the stuff inside the IRA does not have a basis, but the IRA itself can have a basis.

Interesting. Never heard of that.
This is just standard self directed IRA
Im almost positive any withdrawals are treated as ordinary income

 

[FREE866]

How is the 500k in personal invested?

300K in major market index ETFs
200K in CD's and T bills.

 

[FREE866]

and what is basis? If she takes $10k from personal how much is the tax gain?

Total basis for the personal acct is 460K
worth 500K now

 

[pb4uski]

Since from what you posted it looks like she is in the 12% tax bracket, I would do additional tIRA withdrawals to the top of the 12% tax bracket and then taxable account sales.

Top of 12% tax bracket for a single........$39,475
Standard deduction for over 65...............13,850
Income for top of 12% tax bracket..........53,225

Less RMD...........................................(25,000)
Less 85% of SS...................................(17,000)
Less taxable account interest & div...........(x,xxx)

Headroom for 12% tIRA withdrawals......$11,325 minus x,xxx

Better yet, you could use a tax calcuator or the What-If worksheet in Turbo Tax to look at the incremental tax on $30k of tIRA withdrawals, $30k of taxable account withdrawals and 50/50, to get a sense as the the tax implications of the alternatives.

 

[pb4uski]

Interesting. Never heard of that.
This is just standard self directed IRA
Im almost positive any withdrawals are treated as ordinary income

That is typical and makes sense.

 

[FREE866]

Since from what you posted it looks like she is in the 12% tax bracket, I would do additional tIRA withdrawals to the top of the 12% tax bracket and then taxable account sales.

Top of 12% tax bracket for a single........$39,475
Standard deduction for over 65...............13,850
Income for top of 12% tax bracket..........53,225

Less RMD...........................................(25,000)
Less 85% of SS...................................(17,000)
Less taxable account interest & div...........(x,xxx)

Headroom for 12% tIRA withdrawals......$11,325 minus x,xxx

Better yet, you could use a tax calcuator or the What-If worksheet in Turbo Tax to look at the incremental tax on $30k of tIRA withdrawals, $30k of taxable account withdrawals and 50/50, to get a sense as the the tax implications of the alternatives.

awesome
thank you

 

[pb4uski]

300K in major market index ETFs
200K in CD's and T bills.

Total basis for the personal acct is 460K
worth 500K now

So presumably the CDs and TBills have basis roughly equal to fair value.. so if she sells/redeems from those the tax consequences are negligible, but if she sells ETFs she has a gain of 13% ($40 unrealized gains in relation to $300k of ETFs)?

 

[FREE866]

So presumably the CDs and TBills have basis roughly equal to fair value.. so if she sells/redeems from those the tax consequences are negligible, but if she sells ETFs she has a gain of 13% ($40 unrealized gains in relation to $300k of ETFs)?

Correct

 

[pb4uski]

awesome
thank you

But rather than rely on my post, I suggest that you work through the numbers yourself using the post as a guide... model out in What-It or a 2019 tax calculator the alternatives of taking the $30k from the tIRA, or from taxable CDs/Tbills or from taxable ETFs, etc to get an idea of the tax cost associated with each option.

 

[FREE866]

But rather than rely on my post, I suggest that you work through the numbers yourself using the post as a guide... model out in What-It or a 2019 tax calculator the alternatives of taking the $30k from the tIRA, or from taxable CDs/Tbills or from taxable ETFs, etc to get an idea of the tax cost associated with each option.

2019 we are done with. Shes all set. This post was more about planning ahead for 2020 and future....This year she just took the RMD and the other money needed was sitting in checking acct. 2020 that wont be the case. Thank you again.

 

[pb4uski]

So as you know, the amounts above... tax bracket tops, standard deduction and the like.... will be slightly higher in 2020 as a result of adjustment for inflation.... the 2020 amounts just came out a few days ago.