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How are tax-deferred account withdrawals taxed?
Old 10-30-2019, 11:31 AM   #1
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How are tax-deferred account withdrawals taxed?

So, I just want to confirm ... talking about 401Ks, tIRAs, etc ..
all the withdrawals are considered ordinary income when they are taken?

Let's say your IRA is fully invested in stock funds, and there is significant growth. At withdrawal time, it is all taxed as ordinary income? There is no capital gains?

Assuming 15% long term capital gains, perhaps I should be investing more into equities. I am thinking my post-retirement income will force my to a tax bracket >15%.
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Old 10-30-2019, 11:33 AM   #2
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tIRA/401K withdrawals are ordinary income.
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Old 10-30-2019, 11:57 AM   #3
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Quote:
Originally Posted by albireo13 View Post
So, I just want to confirm ... talking about 401Ks, tIRAs, etc ..
all the withdrawals are considered ordinary income when they are taken?

Let's say your IRA is fully invested in stock funds, and there is significant growth. At withdrawal time, it is all taxed as ordinary income? There is no capital gains?

Assuming 15% long term capital gains, perhaps I should be investing more into equities. I am thinking my post-retirement income will force my to a tax bracket >15%.
Yes, ordinary income when received irrespective of the nature of underlying investments.

That is why it is usually recommended to load up tIRAs with bonds since interest in a taxable account is ordinay income as well... equities in a taxable account have numerous tax advantages... most dividends are qualified and therefore preferenced, long-term capital gains are preferenced and for international equities you get the foreign tax credit for foreign taxes paid (which goes to waste in a tax-deferred or tax-free account).

Also see https://www.bogleheads.org/wiki/Tax-...fund_placement
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Old 10-30-2019, 12:46 PM   #4
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Thx
1 yr from retirement ... a bit late for me to change direction at this point.
Oh well.
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Old 10-30-2019, 01:04 PM   #5
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It's never too late, IMO. Maybe you can't do a wholesale change, but you can do incremental changes. Any stocks you sell in your tax-deferred is not a taxable event. Taxes come with withdrawals, not exchanges inside the account.
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Old 10-30-2019, 01:21 PM   #6
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You probably end up better in the IRA even w/ the higher taxes because you
got to invest more to begin with.

a) no IRA. 1K income taxed at 25% so 750 invested. Suppose it doubles to 1.5K. You pay CG taxes of 15% on gain of 750= 112.5 and end up with
1387.5.
b)IRA. 1K income but no tax paid (IRA deduction) so 1K invested. It doubles
to 2K and you pay ordinary taxes (old days) of 25% so end up with 1500 which
beats the taxable account.
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Old 10-30-2019, 02:11 PM   #7
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Thx
1 yr from retirement ... a bit late for me to change direction at this point.
Oh well.
Perhaps not unless you have investments in your taxable accounts with significant unrealized appreciation... if you have bonds in your taxable account they probably don't have significant unrealized gains so some changes might well be possible.... but it sounds like you're not very interested since you dismissed it so readily... good luck to you.
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Old 10-31-2019, 08:38 AM   #8
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Depending on your age and when RMDs are taken it may well be worth changing your bonds to tax deferred and stock index funds to taxable. If your tax rate is the same now and when you are at RMD (70.5 years old) than it may be a wash, but if you can get to the 0% long term cap gains level...(i.e. current law Married file jointly $78k + 24k std deduction (<102K)). Lots of moving parts to think about.
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Old 10-31-2019, 09:52 AM   #9
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This has been troubling me. My dabbling in a few individual stocks have done well, but I started that years ago in a small inherited IRA because (in my mind) that was "found money", not needed or planned for retirement.

I'm considering, in the inherited IRA, selling the stock and buying certain bonds that I hold in a taxable account, and on the same day in the taxable account, selling those bonds and buying the same stock as the IRA holds. It should be a roughly even exchange, and if the prices don't match to my disadvantage, that should be outweighed by the future tax advantage.

Any thoughts on that plan?
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Old 10-31-2019, 10:04 AM   #10
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Originally Posted by The Cosmic Avenger View Post
This has been troubling me. My dabbling in a few individual stocks have done well, but I started that years ago in a small inherited IRA because (in my mind) that was "found money", not needed or planned for retirement.

I'm considering, in the inherited IRA, selling the stock and buying certain bonds that I hold in a taxable account, and on the same day in the taxable account, selling those bonds and buying the same stock as the IRA holds. It should be a roughly even exchange, and if the prices don't match to my disadvantage, that should be outweighed by the future tax advantage.

Any thoughts on that plan?
It's only a good plan if you still believe that the "few" individual stocks are
going to beat the market as a whole. If you are not sure of that, you might sell them in the ira and replace with bonds. Then buy a total stock market fund or S&P 500 index for the taxable, while replacing the bonds you have in taxable.

If you don't mind the risk of individual stocks(think Boeing) then your plan also works fine.
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Old 10-31-2019, 11:18 AM   #11
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It's only a good plan if you still believe that the "few" individual stocks are
going to beat the market as a whole. If you are not sure of that, you might sell them in the ira and replace with bonds. Then buy a total stock market fund or S&P 500 index for the taxable, while replacing the bonds you have in taxable.

If you don't mind the risk of individual stocks(think Boeing) then your plan also works fine.

It's something to consider, but my "dabbling" was in two companies that I have followed closely in the trade press for many, many years and feel personally invested in, Google and Apple. I probably should try to be impartial about it and work out the rates of return and estimate the risk, though.
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Old 10-31-2019, 06:40 PM   #12
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Quote:
Originally Posted by The Cosmic Avenger View Post
This has been troubling me. My dabbling in a few individual stocks have done well, but I started that years ago in a small inherited IRA because (in my mind) that was "found money", not needed or planned for retirement.

I'm considering, in the inherited IRA, selling the stock and buying certain bonds that I hold in a taxable account, and on the same day in the taxable account, selling those bonds and buying the same stock as the IRA holds. It should be a roughly even exchange, and if the prices don't match to my disadvantage, that should be outweighed by the future tax advantage.

Any thoughts on that plan?
Sounds good... just be aware of wash sales if any of your taxable bond positions have unrealized losses... and if your taxable bond portfolio has unrealized gains be aware of any capital gains tax.
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