Dump my IRA
Dump my IRA
I've got an IRA at Schwab, with 2 items only: QQQ and SCHB. Total value 50K. I'm 77 yrs old, single and pay no income taxes coz of low income. The IRA is one of 3 Schwab accounts i have now and i'm working to simplify the entire arrangement.
Schwab frequently advises me to take my RMD. I have recently learned that i can transfer all my IRA shares to another account, and completely close the IRA, with no fees, penalties or taxes owed. Unless some unknown factor comes into play, this is probably what i will do soon.
Are there any particular negative consequences in closing the IRA? I suppose i need also ask if any particular value in keeping the IRA account?
Schwab frequently advises me to take my RMD. I have recently learned that i can transfer all my IRA shares to another account, and completely close the IRA, with no fees, penalties or taxes owed. Unless some unknown factor comes into play, this is probably what i will do soon.
Are there any particular negative consequences in closing the IRA? I suppose i need also ask if any particular value in keeping the IRA account?
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Re: Dump my IRA
If you close the IRA -- and I assume you mean withdraw all the money from it, not rollover to another IRA -- then you will report that amount as income, so potentially you will have to pay income tax on it.
What would you then do with the money? Spend it, re-invest it?
Is this your only retirement account? Do you have other savings?
Why do you want to close it? So you don't have to remember to take RMDs?
What would you then do with the money? Spend it, re-invest it?
Is this your only retirement account? Do you have other savings?
Why do you want to close it? So you don't have to remember to take RMDs?
Retired June 2023. AA = 55/35/10
Re: Dump my IRA
Might be fine, though I’m unclear what the benefit is. Taking your RMD for the year and converting the remainder to a Roth IRA might also be beneficial. I think the best decision would be based on any estate planning concerns you might have.
Steve
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Re: Dump my IRA
Schwab is an excellent low cost broker. Where would you move the funds to? There is now downside to consolidating accounts. If you withdraw the $50k that would be a taxable event and likely would cause you to pay some tax.
- jeffyscott
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Re: Dump my IRA
As other's have said, if the transfer would be to a taxable account, this will add $50K to your income. With that, you will likely owe some income tax for the year in which the withdrawal/transfer occurs.
While there would be no fees and no penalties, the addition of $50K to your income will most likely result in some tax liability.I have recently learned that i can transfer all my IRA shares to another account, and completely close the IRA, with no fees, penalties or taxes owed.
If you are just consolidating two IRA accounts by transfering the $50K to another IRA account that you have, then that would not be a taxable event and I can think of no reason not to do that.
Even with no other income, a $50,000 IRA distribution would result in federal taxes of about $4000 and if you have $13K in SS income, the federal tax would be about $6000. These figures are based on calculator here: https://www.mortgagecalculator.org/calc ... ulator.phpAre there any particular negative consequences in closing the IRA? I suppose i need also ask if any particular value in keeping the IRA account?
If you want to eliminate the account, though I don't see the advatage of doing so, you can maybe take out something more than the RMD but less than the full balance each year such that the withdrawals are enough to eliminate the account over a few years but not trigger a tax bill.
Re: Dump my IRA
I only plan to move the equity shares from the IRA to a taxable account, not sell any shares. Why does that mean i owe taxes on those shares i move? I have not sold anything, have gained no added income. I've only moved pieces of paper (so to speak).
Once those shares are in the taxable account, then when sold, the income will be taxed. That's the way i see it.
Once those shares are in the taxable account, then when sold, the income will be taxed. That's the way i see it.
Re: Dump my IRA
Legally, all you can take out of an IRA is cash. You can use this cash to buy stock, but when you take it out, the IRS views it as cash, and taxes it in full (unless you made a non-deductible contribution). The IRS doesn't care whether you sold stock in the IRA to get the cash, or already had the money as cash.rosalee wrote: ↑Mon Jun 14, 2021 5:55 pm I only plan to move the equity shares from the IRA to a taxable account, not sell any shares. Why does that mean i owe taxes on those shares i move? I have not sold anything, have gained no added income. I've only moved pieces of paper (so to speak).
Once those shares are in the taxable account, then when sold, the income will be taxed. That's the way i see it.
If you convert the traditional IRA to a Roth IRA, you will pay tax on the amount converted, but all withdrawals from the Roth IRA are tax-free as long as you follow the rules. At your age, the converted amount can be withdrawn tax-free at any time, and gains will be tax-free if withdrawn at least five years after you opened your first Roth IRA.
In a taxable account, you pay tax on the dividends every year, even if you do not sell. You then pay tax on your capital gain when you sell. This is inferior to a Roth IRA, so it makes more sense to convert to a Roth IRA than to use a taxable account.
Re: Dump my IRA
As grabiner noted in his reply, legally speaking you can't just "move" shares from one account type to another. IRAs come with an incentive to encourage saving but it's not a freebie: in return for tax-deferred growth for potentially decades, you have to pay income tax when you withdraw from the IRA. If we were allowed to just move shares from an IRA to a taxable account, it would be a big loophole allowing people to completely avoid taxation (i.e., when you pass away, taxable account shares are inherited with a step-up in basis).rosalee wrote: ↑Mon Jun 14, 2021 5:55 pm I only plan to move the equity shares from the IRA to a taxable account, not sell any shares. Why does that mean i owe taxes on those shares i move? I have not sold anything, have gained no added income. I've only moved pieces of paper (so to speak).
Once those shares are in the taxable account, then when sold, the income will be taxed. That's the way i see it.
Here are some choices to consider:
1) Keep the IRA account, take RMDs as necessary. This is what you're doing now. Downside is that you have to deal with the complexity of having the IRA account and taking the RMDs
2) Aim to get rid of the IRA within a few years (or so) by withdrawing more than the RMD. I only suggest this choice if you have a goal to minimize the number of accounts and simplify your portfolio. If that's not your goal, just ignore this one
By withdrawing more than needed, you can speed up the process of getting assets out of the IRA, but at the cost of paying more in tax. You don't have to withdraw all the money in one year. By splitting it up into withdrawals over several years, you can limit how much extra income you get and thus try to stay in a low-income tax bracket. Exactly how much more tax you pay depends on various factors -- if you'd like to consider this option, let us know and we can work through different scenarios to see if it's worth it.
3) Make a qualified charitable distribution (QCD) from the IRA. This obviously only works if you can afford to give away money, but it does allow you to get money out of your IRA in a tax-free manner, plus a QCD can be used to satisfy the RMD requirement.
4) Convert your traditional IRA to Roth IRA, possibly over the course of several years. You do pay income tax on the amount converted, so in that sense it's like withdrawing extra, but the advantage of conversion is you're putting more money in Roth where withdrawals are completely tax-free. This approach might be worth it financially if you only convert just enough to stay in a low tax bracket. Again, Bogleheads can help you determine if it's worth it if you're interested.
- jeffyscott
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Re: Dump my IRA
But, it's not the way the IRS sees it and I think they're gonna win the argument
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When you move the shares to taxable, it's an IRA withdrawal. If the shares are worth $50K on the day you move them, Schwab will be issuing you a 1099 that will show $50K of income (assuming none of the IRA contributions were after tax).
Since you are paying no income tax now, while taking RMDs, it seems foolish to withdraw it all in one year and pay several thousand dollars in federal taxes, plus whatever state income tax you would owe.
Re: Dump my IRA
You see it wrong, sorry to say. That is assuming you have a Traditional IRA rather than a Roth IRA.rosalee wrote: ↑Mon Jun 14, 2021 5:55 pm I only plan to move the equity shares from the IRA to a taxable account, not sell any shares. Why does that mean i owe taxes on those shares i move? I have not sold anything, have gained no added income. I've only moved pieces of paper (so to speak).
Once those shares are in the taxable account, then when sold, the income will be taxed. That's the way i see it.
You can transfer the shares (in-kind) from your IRA to your taxable account. Or you can sell your shares in the IRA and then transfer the cash to your taxable account.
In either case, you will add $50,000 to your ordinary income for the year.
The amount of taxes you owe on the $50,000 will depend on your other income.
You can use the TaxCaster app to estimate federal taxes both with and without closing out your IRA.
If you haven’t been taking a RMD each year since you turned 70.5, then you have a problem with the IRS.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Re: Dump my IRA
I think you can take a distribution of shares (not sell) and move those shares to taxable. The cost basis of the shares is the value of the shares on distribution date.grabiner wrote: ↑Mon Jun 14, 2021 6:10 pmLegally, all you can take out of an IRA is cash. You can use this cash to buy stock, but when you take it out, the IRS views it as cash, and taxes it in full (unless you made a non-deductible contribution). The IRS doesn't care whether you sold stock in the IRA to get the cash, or already had the money as cash.rosalee wrote: ↑Mon Jun 14, 2021 5:55 pm I only plan to move the equity shares from the IRA to a taxable account, not sell any shares. Why does that mean i owe taxes on those shares i move? I have not sold anything, have gained no added income. I've only moved pieces of paper (so to speak).
Once those shares are in the taxable account, then when sold, the income will be taxed. That's the way i see it.
If you convert the traditional IRA to a Roth IRA, you will pay tax on the amount converted, but all withdrawals from the Roth IRA are tax-free as long as you follow the rules. At your age, the converted amount can be withdrawn tax-free at any time, and gains will be tax-free if withdrawn at least five years after you opened your first Roth IRA.
In a taxable account, you pay tax on the dividends every year, even if you do not sell. You then pay tax on your capital gain when you sell. This is inferior to a Roth IRA, so it makes more sense to convert to a Roth IRA than to use a taxable account.
Fidelity gave me this info as well as the following linkfrom TDAmeritrade
https://tickertape.tdameritrade.com/ret ... rmds-17385
I do believe distributions from 401k must be in cash.
Re: Dump my IRA
I would have a tax person look at all your investments, including real estate. They can help you decide how to withdraw or convert from the IRA and how sell property and investments to keep your taxes low. Reading through your posts, it seems like there could be pretty large differences in the amount of taxes you will have to pay depending on how these things are done.
Re: Dump my IRA
As noted above, you can’t get out of paying taxes on money (or shares of stock, etf or mf) removed from an IRA. The guys over at the Retirement and IRA show calls an IRA an “always taxable account” as opposed to the sometimes taxable (taxable account) or never taxable (Roth account).
Now that you know that you can’t get out of paying taxes on this money by moving the shares, you have multiple options.
1. Leave it alone and continue taking rmds.
2. Move it to another brokerage and take rmds from the new ira.
3. Convert the money (all or part, remembering that the first money that comes out has to be the RMD, unless you make a qcd ) to a Roth, where you don’t have RMD s, paying taxes on the conversion.
4. Give the money to charity, (via a qcd) getting rid of rmds with no taxes.
Now that you know that you can’t get out of paying taxes on this money by moving the shares, you have multiple options.
1. Leave it alone and continue taking rmds.
2. Move it to another brokerage and take rmds from the new ira.
3. Convert the money (all or part, remembering that the first money that comes out has to be the RMD, unless you make a qcd ) to a Roth, where you don’t have RMD s, paying taxes on the conversion.
4. Give the money to charity, (via a qcd) getting rid of rmds with no taxes.
https://www.fidelity.com/building-savin ... 0deduction.A QCD is a direct transfer of funds from your IRA custodian, payable to a qualified charity. QCDs can be counted toward satisfying your required minimum distributions (RMDs) for the year, as long as certain rules are met.
Re: Dump my IRA
However, this is equivalent to selling the shares, taking out the cash, and buying back the same shares. The tax treatment is also the same. (If you do want to hold the same shares, you might as well take them in kind, to avoid transaction costs for selling and buying them back.)Dottie57 wrote: ↑Mon Jun 14, 2021 8:00 pmI think you can take a distribution of shares (not sell) and move those shares to taxable. The cost basis of the shares is the value of the shares on distribution date.grabiner wrote: ↑Mon Jun 14, 2021 6:10 pmLegally, all you can take out of an IRA is cash. You can use this cash to buy stock, but when you take it out, the IRS views it as cash, and taxes it in full (unless you made a non-deductible contribution). The IRS doesn't care whether you sold stock in the IRA to get the cash, or already had the money as cash.rosalee wrote: ↑Mon Jun 14, 2021 5:55 pm I only plan to move the equity shares from the IRA to a taxable account, not sell any shares. Why does that mean i owe taxes on those shares i move? I have not sold anything, have gained no added income. I've only moved pieces of paper (so to speak).
Once those shares are in the taxable account, then when sold, the income will be taxed. That's the way i see it.
If you convert the traditional IRA to a Roth IRA, you will pay tax on the amount converted, but all withdrawals from the Roth IRA are tax-free as long as you follow the rules. At your age, the converted amount can be withdrawn tax-free at any time, and gains will be tax-free if withdrawn at least five years after you opened your first Roth IRA.
In a taxable account, you pay tax on the dividends every year, even if you do not sell. You then pay tax on your capital gain when you sell. This is inferior to a Roth IRA, so it makes more sense to convert to a Roth IRA than to use a taxable account.
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Re: Dump my IRA
You will create a taxable event for withdrawing the $50k in a qualified traditional IRA. (Selling or transferring to a taxable account)
I would leave it and deal with the RMDs.
Or... For tax advantage... Withdraw it in smaller chunks over 2-5 separate tax yrs.zeroing out your IRA withdrawal tax obligations with std deduction.
I would leave it and deal with the RMDs.
Or... For tax advantage... Withdraw it in smaller chunks over 2-5 separate tax yrs.zeroing out your IRA withdrawal tax obligations with std deduction.
Re: Dump my IRA
What's the downside to consolidating? I've got several I'd like to merge such as a rollover 401k IRA to my regular t-IRA.aristotelian wrote: ↑Mon Jun 14, 2021 6:41 am Schwab is an excellent low cost broker. Where would you move the funds to? There is now downside to consolidating accounts. If you withdraw the $50k that would be a taxable event and likely would cause you to pay some tax.
Re: Dump my IRA
When you contributed to the IRA, did you subtract the contributions from your income each year? (This is the default that the vast majority of working taxpayers do.) If so, by doing that you were tax-deferring the taxes. They were not forgiven, but just considered part of the account. While you had the account, you were really investing Uncle Sam’s share (of taxes owed), the state’s share (of taxed owed, if your state collects income tax) as well as your own money. The money in the account was never all yours. It belongs to the 3 of you.rosalee wrote: ↑Mon Jun 14, 2021 5:55 pm I only plan to move the equity shares from the IRA to a taxable account, not sell any shares. Why does that mean i owe taxes on those shares i move? I have not sold anything, have gained no added income. I've only moved pieces of paper (so to speak).
Once those shares are in the taxable account, then when sold, the income will be taxed. That's the way i see it.
In exchange for tax-deferring, you were agreeing that when you removed anything from the account, part of each withdrawal would go to Uncle Sam, to the state, and to you. To calculate the taxes owed, the amount of any withdrawal is reported on your tax return and is taxed as ordinary income.
If you put the shares in a taxable account, the current cost of the shares on the day of removal becomes the cost basis for when you sell those shares in the future.
HOWEVER, if you convert those shares instead, you will pay the same taxes (as if you had done a withdrawal to taxable). Once the shares are in a Roth IRA, they can continue to grow. The growth will be tax-free as long as the Roth was opened over 5 years ago and you are over 59.5 at the time of the Roth withdrawal.
Note that you are required to first remove any RMDs each year before doing the Roth conversion.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: Dump my IRA
Sorry, that was a typo. No downside to consolidating.Jablean wrote: ↑Tue Jun 15, 2021 1:42 amWhat's the downside to consolidating? I've got several I'd like to merge such as a rollover 401k IRA to my regular t-IRA.aristotelian wrote: ↑Mon Jun 14, 2021 6:41 am Schwab is an excellent low cost broker. Where would you move the funds to? There is now downside to consolidating accounts. If you withdraw the $50k that would be a taxable event and likely would cause you to pay some tax.
- anon_investor
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Re: Dump my IRA
Depending on the state loss of liability protections on the rolled over funds for your 401k, and if you are still working some 401k plans will only accept rollovers from funds originally from a 401k and kept segregated from other tIRA funds.Jablean wrote: ↑Tue Jun 15, 2021 1:42 amWhat's the downside to consolidating? I've got several I'd like to merge such as a rollover 401k IRA to my regular t-IRA.aristotelian wrote: ↑Mon Jun 14, 2021 6:41 am Schwab is an excellent low cost broker. Where would you move the funds to? There is now downside to consolidating accounts. If you withdraw the $50k that would be a taxable event and likely would cause you to pay some tax.
Re: Dump my IRA
This is a bad idea. Assuming your IRA is a traditional IRA, this will trigger $50k in income.
Also, if you aren't taking your RMD, you are likely liable for a large penalty.
Also, if you aren't taking your RMD, you are likely liable for a large penalty.
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Re: Dump my IRA
+1. Withdrawing the money all at once is almost certainly a mistake and will trigger a large tax liability - you'll realize $50K in income and have to pay tax on that amount. If you don't need the money for current consumption, just keep taking your RMDs as required.
You could consider converting an additional amount each year, say to the top of the 12% tax bracket of $40,000 into a Roth IRA that never needs to be withdrawn from by you and can be inherited tax free by your heirs. They will owe tax at their regular income on funds they inherit in your traditional IRA.
Also consider moving from 100% US stock portfolio into your IRA to an all-in-one fund such a Vanguard life strategy moderate growth. That will give you a healthier mix of US stocks, foreign stock, and bonds. You don't mention your other holdings, but 100% stock seems unnecessarily risky at your age.
Re: Dump my IRA
I agree taxation is absolutely the same. I just like being in the market at all times.grabiner wrote: ↑Mon Jun 14, 2021 10:33 pmHowever, this is equivalent to selling the shares, taking out the cash, and buying back the same shares. The tax treatment is also the same. (If you do want to hold the same shares, you might as well take them in kind, to avoid transaction costs for selling and buying them back.)Dottie57 wrote: ↑Mon Jun 14, 2021 8:00 pmI think you can take a distribution of shares (not sell) and move those shares to taxable. The cost basis of the shares is the value of the shares on distribution date.grabiner wrote: ↑Mon Jun 14, 2021 6:10 pmLegally, all you can take out of an IRA is cash. You can use this cash to buy stock, but when you take it out, the IRS views it as cash, and taxes it in full (unless you made a non-deductible contribution). The IRS doesn't care whether you sold stock in the IRA to get the cash, or already had the money as cash.rosalee wrote: ↑Mon Jun 14, 2021 5:55 pm I only plan to move the equity shares from the IRA to a taxable account, not sell any shares. Why does that mean i owe taxes on those shares i move? I have not sold anything, have gained no added income. I've only moved pieces of paper (so to speak).
Once those shares are in the taxable account, then when sold, the income will be taxed. That's the way i see it.
If you convert the traditional IRA to a Roth IRA, you will pay tax on the amount converted, but all withdrawals from the Roth IRA are tax-free as long as you follow the rules. At your age, the converted amount can be withdrawn tax-free at any time, and gains will be tax-free if withdrawn at least five years after you opened your first Roth IRA.
In a taxable account, you pay tax on the dividends every year, even if you do not sell. You then pay tax on your capital gain when you sell. This is inferior to a Roth IRA, so it makes more sense to convert to a Roth IRA than to use a taxable account.
- jeffyscott
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Re: Dump my IRA
OP said they are paying no income tax, due to low income. So, I would suggest possibly converting an additional amount only to the extent that it can be done tax-free.Outer Marker wrote: ↑Tue Jun 15, 2021 10:48 am You could consider converting an additional amount each year, say to the top of the 12% tax bracket of $40,000 into a Roth IRA that never needs to be withdrawn from by you and can be inherited tax free by your heirs. They will owe tax at their regular income on funds they inherit in your traditional IRA.
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Re: Dump my IRA
Depends on many unknowns. If the OP needs and is going to use the money, yes, agree, keep it at zero. But, if it’s going to heirs, the 12% bracket for tax-free inherited roth is a good deal. We don’t know enough about OPs situation. Jeff Bezos also has zero income.jeffyscott wrote: ↑Tue Jun 15, 2021 1:08 pmOP said they are paying no income tax, due to low income. So, I would suggest possibly converting an additional amount only to the extent that it can be done tax-free.Outer Marker wrote: ↑Tue Jun 15, 2021 10:48 am You could consider converting an additional amount each year, say to the top of the 12% tax bracket of $40,000 into a Roth IRA that never needs to be withdrawn from by you and can be inherited tax free by your heirs. They will owe tax at their regular income on funds they inherit in your traditional IRA.