Cap Gains Rate vs Effective Rate

[marko]

I think I know the answer here but want to double check. "Numbers is hard for me"

All things being equal:
If one's after tax cap gains are taxed at 15% and one's effective tax rate is 15% does that mean that if I were to withdraw from my IRA or my after tax account it would make no difference?

Or are all things unequal in that the mix of IRA/after tax skews the tax profile even while maintaining a net 15% effective rate?

 

[pb4uski]

I don't think so. Money that you withdraw from your IRA is likely all ordinary income and would be taxed at ordinary rates of 0% (if income before tIRA withdrawals were less than the standard deduction), 10%, 12%, 22%, etc. If you were already in the 12% tax bracket and the tIRA withdrawal bridged the 12% and 22% tax brackets then it is possible that the marginal rate might be 15%, but it would be rare.

LTCG rates are generally 15%, but 0% for lower income levels and 20% or more for really high income levels.

I think your best bet is to use something like the dinkytown tax calculator to but in your base case and then look at the increase in tax in relation to $x of tIRA withdrawals or the increase in tax in relation to $x of added LTCG.

 

[RunningBum]

I'm going with B, all things unequal.

The main thing is, from your after tax account you only pay tax on the gains. If you need $10K, and have $10K in a fund with $5K of capital gains, you only pay capital gains tax on $5K. On an IRA withdrawal you pay ordinary income taxes on the full $10K. It's less of a hit to take from your after tax account unless your basis is $0.

On the other hand, if you're at all concerned with leaving something to heirs, your IRA will have to be drained by you or them at some point. But as the rules are today (subject to change), they would get stepped up basis on holdings in your after tax account, so it could be better to just hold onto those.

If charitable giving is a factor, consider whether it's better to do QCDs from your tIRA and giving appreciated assets. The latter relies on itemizing deductions.

Watch for any additional hits caused by taking more income, such as IRMAA, or causing more of your SS or QDivs/LTCGs to be taxed. That might favor taking from your taxable account to limit income.

There is no 15% bracket right now for regular income. I guess by "effective tax rate" you mean overall tax rate? That doesn't cover what the additional $10K (or whatever amount) you are taking, so I suggest using the marginal rate.

For the most part, it's probably not that much of a difference. But they aren't equal.

 

[audreyh1]

Often very different. The tax calcs are quite different.