Should I withdraw from my taxable account to fund my Roth IRA?

[RetireBy90]

I can do a one time $6k but that means I will have to withdraw from my taxable account.

VTSAX is a taxable account at Vanguard.
FZROX is a Roth IRA at Fidelity.

Again, I understand you will incur cap gains if you withdraw from taxable account. So your choice. I don’t see any significant difference.

If you do the withdraw from your taxable account you will have to pay short term cap gains of 22%. However you will get any gains in 2022 tax free.

If you do monthly $500 then no cap gains as VSTAX can continue to grow, with tax hit delayed and possibly be at a lower rate.

 

[F.I.R.E User]

Again, I understand you will incur cap gains if you withdraw from taxable account. So your choice. I don’t see any significant difference.

If you do the withdraw from your taxable account you will have to pay short term cap gains of 22%. However you will get any gains in 2022 tax free.

If you do monthly $500 then no cap gains as VSTAX can continue to grow, with tax hit delayed and possibly be at a lower rate.

So best thing to do is not tap into VTSAX taxable at Vanguard and do $500 monthly into Roth IRA FZROX in 2022?

 

[Exchme]

Something is wrong with the way I'm reading the numbers in this thread. If your gross income is $60K and you are contributing $19.5K to a traditional 401K, that gives a taxable income of $60-19.5-12.55 = $27.95K.

That's a 12% bracket so you would have room up for up to about $12.4K in Long Term Capital Gains that will be taxed at zero. To get to the 22% bracket you stated (and therefore above the top of the 0% LTCG bracket), something else is going on. Maybe you mean that your taxable income after correcting for your 401K deduction and standard deduction is $60K?

If you really do have room below $40,400 taxable income, then you can sell the Vanguard account after September (to ensure they have been in there more than 1 year so will be LTCG) with no taxes. There is no wash sale rule to harvest gains, so you can then re-buy exactly the same thing immediately if you want, move it to Fidelity, or whatever else you choose. If this is the case, it may also be worth your while to find other taxable accounts with gains and harvest as many of those as you can within the 0% LTCG range as well.

 

[F.I.R.E User]

Something is wrong with the way I'm reading the numbers in this thread. If your gross income is $60K and you are contributing $19.5K to a traditional 401K, that gives a taxable income of $60-19.5-12.55 = $27.95K.

That's a 12% bracket so you would have room up for up to about $12.4K in Long Term Capital Gains that will be taxed at zero. To get to the 22% bracket you stated (and therefore above the top of the 0% LTCG bracket), something else is going on. Maybe you mean that your taxable income after correcting for your 401K deduction and standard deduction is $60K?

If you really do have room below $40,400 taxable income, then you can sell the Vanguard account after September (to ensure they have been in there more than 1 year so will be LTCG) with no taxes. There is no wash sale rule to harvest gains, so you can then re-buy exactly the same thing immediately if you want, move it to Fidelity, or whatever else you choose. If this is the case, it may also be worth your while to find other taxable accounts with gains and harvest as many of those as you can within the 0% LTCG range as well.

I also have $500 FSA and health insurance which is not taxed.
Yeah, 12% sounds right. Initially, I was in 22% but t401k contributions lowered that. Would the $3,600k match help lower even more?

I always take standard deduction as gives back maximum refund.

Not all shares were bought on September 2020 at Vanguard taxable account.

I do have ESPP so I am taxed at 0% when I sell them after 1 year.

 

[Exchme]

The employer match in your t-401K does not matter for your current taxes. You can select SpecID for the basis for the shares so you can be select which ones to sell and when so you ensure you don't sell anything early. I don't know the rules for ESPP's, probably any gains you make there are also nibbling away at the $12,400 or so that you have between your ordinary taxable income and the top of the 0% bracket. But it sounds like you have plenty of room.

If you can't fill up the 0% bracket with capital gains, then you may want to look at a backdoor Roth conversion of some of your t401K to a Roth401K to take up some of the 12% bracket. You will need to contact your employer to see what is possible.

So let's say you can find $3K of LTCGs and ESPP gains to harvest, leaving you $9K to play with. So you could consider converting $9K and pay taxes this year on that (around $1K) and still stay within the 12% bracket.

The attractiveness of that depends on your job prospects in the future more than anything else (and we can't help you predict that!). If you are in a growing field, your income may rise in the future and you could be very glad you socked away some money in a Roth. If you are more likely to have to hop around between jobs or are in an industry that is suffering, then maybe not such a good idea.

 

[F.I.R.E User]

The employer match in your t-401K does not matter for your current taxes. You can select SpecID for the basis for the shares so you can be select which ones to sell and when so you ensure you don't sell anything early. I don't know the rules for ESPP's, probably any gains you make there are also nibbling away at the $12,400 or so that you have between your ordinary taxable income and the top of the 0% bracket. But it sounds like you have plenty of room.

If you can't fill up the 0% bracket with capital gains, then you may want to look at a backdoor Roth conversion of some of your t401K to a Roth401K to take up some of the 12% bracket. You will need to contact your employer to see what is possible.

So let's say you can find $3K of LTCGs and ESPP gains to harvest, leaving you $9K to play with. So you could consider converting $9K and pay taxes this year on that (around $1K) and still stay within the 12% bracket.

The attractiveness of that depends on your job prospects in the future more than anything else (and we can't help you predict that!). If you are in a growing field, your income may rise in the future and you could be very glad you socked away some money in a Roth. If you are more likely to have to hop around between jobs or are in an industry that is suffering, then maybe not such a good idea.

I am planning to retire with the current Megacorp. Therefore, I will qualify for Rule of 55 if I want to retire anytime after that and 59.5 with no penalty. My company does offer Roth 401k.

 

[TheWizard]

It's fine to have a growing taxable account along with tax-deferred and Roth.
Why not just fund the $6000 into the Roth IRA with money from your paycheck in the early months of the year. Once topped out, put additional money in your taxable account for the remainder of the year...

 

[F.I.R.E User]

It's fine to have a growing taxable account along with tax-deferred and Roth.
Why not just fund the $6000 into the Roth IRA with money from your paycheck in the early months of the year. Once topped out, put additional money in your taxable account for the remainder of the year...

I won’t have $6k ready in January 2022 unless I withdraw from my taxable Vanguard account (VTSAX).

 

[Gumby]

I won’t have $6k ready in January 2022 unless I withdraw from my taxable Vanguard account (VTSAX).

Have you done a Roth contribution for 2021 yet? You have until April 15, 2022 to do that. If you haven't yet contributed to a Roth for 2021, you could use the money you have in VTSAX now to make that contribution, then in January 2022 start contributing $500 per month to your Roth for 2022.

 

[F.I.R.E User]

Have you done a Roth contribution for 2021 yet? You have until April 15, 2022 to do that. If you haven't yet contributed to a Roth for 2021, you could use the money you have in VTSAX now to make that contribution, then in January 2022 start contributing $500 per month to your Roth for 2022.

I am at $5.5k so far for Roth IRA 2021. $500 to go and I will get it within a week or two using my paycheck.

 

[Gumby]

Good to hear. Then I'd just start my monthly contributions for 2022 in January.

 

[F.I.R.E User]

Good to hear. Then I'd just start my monthly contributions for 2022 in January.

I’ll do the $500 a month in 2022.