Help on Understanding Tax on Wellington Fund

[gamboolman]

My wife and I are nearing retirement and have a question on income taxes on our Vanguard Wellington account.

We have a basic simple question. We did try to search and find the answer - but No Joy. We are not very knowledgeable regarding finances or computers.... - but we are reading up and learning.

We know that we pay income tax on interest gained each year - the 1099 form we get each year.

Our question is regarding if we pull some of the principal out for expenses. The initial investment was made with monies that had been taxed and we have paid taxes each year on interest gained....So would we have to pay tax on the principal withdrawn?

Thanks for the help and assistance.

Gamboolman & Gamboolgal...

 

[jabbahop]

You should only pay on the GAINS you have at capital gains tax rates. for example if you purchased $1000 worth and it is now worth $1500, you would only pay tax on the $500 gain


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[gamboolman]

Thank you for the prompt reply

 

[robertf57]

You should only pay on the GAINS you have at capital gains tax rates. for example if you purchased $1000 worth and it is now worth $1500, you would only pay tax on the $500 gain

Not likely to be totally correct. If you didn't take the previous interest or had reinvested gains previously, your "basis" will be higher that the amount you initially invested. So you will likely pay tax on less of the money you take out than you purchased. You should be able to find your cost-basis online or by calling the brokerage house.

 

[JoeWras]

Here is where you are going to also have to do some homework to learn about basis. Vanguard has an overview page, and also a page about your choices: FIFO, Specific, AvgCost

Before you pull out funds, you'll want to think about tax strategy and choose your basis before the first withdrawal. Specific Lot gives most flexibility, but also more work during the transaction. AvgCost is easiest, but perhaps not most tax efficient. Check out those links above. Changing the method is easy on your Vanguard account, or you can call them to discuss and change.

 

[gcgang]

My wife and I are nearing retirement and have a question on income taxes on our Vanguard Wellington account.

We have a basic simple question. We did try to search and find the answer - but No Joy. We are not very knowledgeable regarding finances or computers.... - but we are reading up and learning.

We know that we pay income tax on interest gained each year - the 1099 form we get each year.

Our question is regarding if we pull some of the principal out for expenses. The initial investment was made with monies that had been taxed and we have paid taxes each year on interest gained....So would we have to pay tax on the principal withdrawn?

Thanks for the help and assistance.

Gamboolman & Gamboolgal...

When you originally invested, you purchased shares at a certain price. Your reinvestment of interest/dividends does not affect the original purchase (unless some of your distributions were return of principal). Each reinvestment is viewed as if you received the distribution, resulting in income for you, and then purchased more shares at whatever the price was on the date of reinvestment.

As mentioned in another post, you could elect to take the average cost of all shares when selling, or specifically identify which shares and purchase date/price you are selling.

 

[gamboolman]

Thanks to all for the replies, advice and information.

We will work with our Vanguard Advisor and study up to understand the basis.

These are good problems to have. This is great community for folks like us.

To be honest - we have'nt looked at withdrawal strategies - we have just been saving, and still are. But the end is in sight.