Which investments should be sold first?

[FREE866]

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.

Gotcha.....I'm thinking there won't be a huge difference either way I decide....we aren't talking about hundreds of thousands of dollars being withdrawn...

 

[youbet]

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

That's not correct. You're confusing IRA basis with "cost basis." The basis of an IRA is the amount of contribution that was made with post-tax money. That is, a "non-deductible contribution." It's not related to "cost basis" in any way.

If you made no post tax contributions (or failed to keep track of post tax contributions with form 8606), then your IRA basis is zero.

The taxable portion of an IRA withdrawal (RMD or not) is the pro-rata portion withdrawn. If 50% of your IRA contributions were made with post tax money and you withdraw $10k, then $5k of the withdrawal is taxable.

Edit: Should have read ahead I guess. I see that Fermion already addressed this.

 

[FREE866]

That's not correct. You're confusing IRA basis with "cost basis." The basis of an IRA is the amount of contribution that was made with post-tax money. It's not related to "cost basis" in any way.

If you made no post tax contributions (or failed to keep track of post tax contributions with form 8606), then your IRA basis is zero.

The taxable portion of an IRA withdrawal (RMD or not) is the pro-rata portion withdrawn. If 50% of your IRA contributions were made with post tax money and you withdraw $10k, then $5k of the withdrawal is taxable.

Im confused. I was under the impression that for tax purposes any withdrawals made are simply treated as "ordinary income". So you're saying thats not the case?
can you provide a source so I can read up on this?

 

[pb4uski]

Im confused. I was under the impression that for tax purposes any withdrawals made are simply treated as "ordinary income". So you're saying thats not the case?
can you provide a source so I can read up on this?

In many/most cases, any withdrawals are ordinary income because all contributions have been deductible (pre-tax).

In some cases, people have made non-deductible contributions to IRAs over the years so a portion of their withdrawals are not taxable.

I made a conscious decision in my 30s not to make any non-deductible contributions because I didn't want the headache of keeping track of my basis... and I was a CPA.

 

[youbet]

Im confused. I was under the impression that for tax purposes any withdrawals made are simply treated as "ordinary income". So you're saying thats not the case?
can you provide a source so I can read up on this?

Correct. That is NOT the case.

If there is a basis in the IRA, (NOT "cost basis"), then some portion of the IRA withdrawals are tax free. I have this situation as DW and I made non-deductible contributions to our IRA's over the years. Filing form 8606 in years we made non-deductible contributions was quick and simple (even for a factory worker with no accounting or tax training like me) and was financially beneficial for us.

Just Google "non-deductible IRA contribution" or the instructions for form 8606 to read more about it.

I'm guessing this situation does not apply to your mother. I just wanted to point out that there is an exception to "any withdrawals made are simply treated as ordinary income."

 

[pb4uski]

^^^ WADR, I think you are harping on this too much. Not many taxpayers had non-deductible IRA contributions.

 

[Sunset]

Typically people made non-deductible contributions to their IRA because their income was high.
This should be recorded on the 8086 tax form

https://www.investopedia.com/articles/retirement/04/030304.asp

So when people later withdraw money from their IRA, the percentage that was non-deductible is not taxed.

So you could ask you Mother although who remembers that far back, or look for for 8086 in old records, I wonder if asking IRS for the last 8086 numbers would work ?

Now I see, I have contributed to the harping on this subject, so OP can take relieve in knowing its probably turns out a small amount anyhow, if it even exists.

 

[Fermion]

Im confused. I was under the impression that for tax purposes any withdrawals made are simply treated as "ordinary income". So you're saying thats not the case?
can you provide a source so I can read up on this?

It does get a little bit complicated if you have multiple IRAs because the basis is spread out among ALL of your IRAs.

Example: You make a total of $15,000 in non deductible contributions years ago to a IRA, which has now grown to $50,000. You have another regular IRA that is $70,000 and had only deductible contributions. If you withdraw $10,000 from any IRA, a portion (15000/120000, or 12.5%) will be tax free and not count toward your income.

It gets really complicated if you didn't file form 8606 each year you made the non deductible contribution.

Most likely none of this applies in your mother's case, unless she always had a really high income when she was making those IRA contributions.

 

[Finance Dave]

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.

Agree. When I left MegaCorp we determined the split, moved the tax-deferred portion to a TIRA and the non-deductible (after tax) portion to a Roth.

As for the OP, I agree with some who say look at the tax brackets and take just enough out of the TIRA to get close to a tax bracket, then from other investments for any additional needed.

 

[youbet]

Now I see, I have contributed to the harping on this subject........

Naw....... no one is "harping." Just keeping the facts straight. The whole business of "cost basis" vs "IRA basis" and non-deductible TIRA contributions comes up from time to time on this forum since there seem to be a number of members who, during their working years, earned over the TIRA deductibility limits. It doesn't sound like it's going to apply to OP's mother but it would be easy for OP to check out. For example, if he knows his mother's income was never near the IRS IRA deductibility limits, he's done.

If you make non-deductible TIRA contributions, filing form 8606 is optional. But you'd be silly not to since it's very, very easy to do and results in paying lower taxes in future years when you make withdrawals.

I agree with you, and as I mentioned earlier, this nuance likely does not apply to OP's mother's situation.

 

[pb4uski]

.... I agree with you, and as I mentioned earlier, this nuance likely does not apply to OP's mother's situation.

Despite 10 of the 35 posts in this thread referring to the potential in one way or another.

 

[N02L84ER]

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

Since she needs to withdraw extra funds, she should not be doing dividend reinvestments with ETFs in her taxable account. It just creates more data entries at tax time, potentially increases her taxes, and potentially causes wash sales. I would find out how much money is paid out in dividends in the taxable account and if it is less than 30K, I would stop all of those reinvestments.

 

[FREE866]

Correct. That is NOT the case.

If there is a basis in the IRA, (NOT "cost basis"), then some portion of the IRA withdrawals are tax free. I have this situation as DW and I made non-deductible contributions to our IRA's over the years. Filing form 8606 in years we made non-deductible contributions was quick and simple (even for a factory worker with no accounting or tax training like me) and was financially beneficial for us.

Just Google "non-deductible IRA contribution" or the instructions for form 8606 to read more about it.

I'm guessing this situation does not apply to your mother. I just wanted to point out that there is an exception to "any withdrawals made are simply treated as ordinary income."

Gotcha


yeah, this doesn't apply to her, but thank you for the info

 

[pb4uski]

Since she needs to withdraw extra funds, she should not be doing dividend reinvestments with ETFs in her taxable account. It just creates more data entries at tax time, potentially increases her taxes, and potentially causes wash sales. I would find out how much money is paid out in dividends in the taxable account and if it is less than 30K, I would stop all of those reinvestments.

+1 take all taxable account income in cash since you have to declare it for tax purposes anyway.