Help with tax implications from taxable account withdrawal

[volfan]

Looking for some general advice to minimize taxes I will owe on 5-10k money withdrawn from a taxable account. I need to make a withdrawal and my two choices are both American funds. Growth fund of America AGTHX (growth stocks) which has been doing very well and has a higher value now than the cost basis or American High Income Trust AHITX which is high yield bonds and pays a decent dividend but has a lower value than the cost basis now. (Would this mean I would take a loss?)

My broker advised the funds before I knew about the "don't put bonds in taxable" advice so if I use the bond money that will reduce my holding which may be good long term.

Currently I am trying to figure out how my withdrawals will be taxed as I am trying to stay in the 15 percent tax bracket to avoid taxes on capital gains. I am right on the edge and will need to make further adjustments in my deferred income if this withdrawal adds a significant tax burden.

Any advice or information is appreciated. I wanted some input before I call and tell her I need to make a withdrawal as I have a feeling she won't be overly conscious of the taxes since the bonds are in that taxable account instead of a Roth IRA to begin with.

The good news is the bulk of my retirement portfolio is in Vanguard[emoji3] and with deferred compensation at work.

Thanks!

 

[pb4uski]

Looking for some general advice to minimize taxes I will owe on 5-10k money withdrawn from a taxable account. I need to make a withdrawal and my two choices are both American funds. Growth fund of America AGTHX (growth stocks) which has been doing very well and has a higher value now than the cost basis or American High Income Trust AHITX which is high yield bonds and pays a decent dividend but has a lower value than the cost basis now. (Would this mean I would take a loss?) ....

Currently I am trying to figure out how my withdrawals will be taxed as I am trying to stay in the 15 percent tax bracket to avoid taxes on capital gains. I am right on the edge and will need to make further adjustments in my deferred income if this withdrawal adds a significant tax burden. ....

If I understand you correctly, the high yield bond fund has an unrealized loss and the growth fund has an unrealized gain.... right?

If so, I would take out all the high yield bond fund.... that would generate a loss and then some shares of the growth fund that are sufficient to generate long-term capital gains equal to the loss on the bond fund.... that way your net gain will be a big, fat zero and will not cause you to breach the top of the 15% tax bracket.

Keep in mind that you can elect to sell shares based on what is called the specific identification method... so you can cherry pick purchase lots with certain levels of gain.

If you access your funds online then you should be able to lookup your unrealized gains by purchase lot (at least you can on Vanguard and I suspect that would be a standard feature for most providers).

 

[volfan]

So basically the way it is taxed is based on the unrealized loss or gain? I will access my account and see if it shows that.
I know it is supposed to be "buy low, sell high" but in this case for tax purposes it appears I would be better off the opposite. I think she is going to say sell some of the growth fund as I would be taking the gains (selling high) but then I will lose 15 percent of it. Thank you for your insight and providing me with some ammunition!

 

[RunningBum]

"Buy low, sell high" is an investment goal. But when it comes time to select what to sell, you look at your tax situation, and what you might want to sell off to keep your asset allocation where you want it. So if selling a loser helps your tax situation, do it. Regards asset allocation, if you're low on bonds, you can still sell bonds in your taxable account, and buy them back in your tax deferred. Just watch out for wash sales, as you'll lose the benefit of any tax loss permanently. Buy a different bond fund or wait 60 days.


Make sure your Vanguard account options are set up so that your sell basis is on "Specified ID" (or whatever similar term they use), rather than average cost or FIFO. Then you can start the sell process and select which shares you want to sell, assuming you bought at different times, and choose the ones with little or no gain, or a loss, since your situation is that you want to minimize gains.

 

[pb4uski]

So basically the way it is taxed is based on the unrealized loss or gain? I will access my account and see if it shows that.
I know it is supposed to be "buy low, sell high" but in this case for tax purposes it appears I would be better off the opposite. I think she is going to say sell some of the growth fund as I would be taking the gains (selling high) but then I will lose 15 percent of it. Thank you for your insight and providing me with some ammunition!

When you sell, the unrealized gain (or loss).... the difference between the value/selling price and the cost basis.... becomes realized.... and therefore reported.

 

[LOL!]

Have you read IRS Publication 550 yet? It tells you how it will be taxed. Also read the instructions for IRS Form 1040 and its Schedule D.

 

[volfan]

Thanks for all the info! And I will read publication 550!

 

[sengsational]

My approach is to use the tax software on my PC with various scenarios (I just use the previous year's software, which should be roughly accurate).

There are some principles that you can start with, such as the ones mentioned, but there are quite a few "moving parts" in the tax code, and you can learn a lot by running some "what if" scenarios. Reading the IRS publications is, frankly, very low on my list. I might read one specific part of one publication to get clarification on a point, but I haven't found reading any of them cover to cover worth much, since they have to address to many situations, and my situation is such a tiny sliver.

 

[volfan]

Thanks for all the info! And I will read publication 550!