Sell in Taxable Brokerage to fund IRA?

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RanchHand
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Sell in Taxable Brokerage to fund IRA?

Post by RanchHand »

Good morning,

I'm on track to max a 401k and 457b this year for the first time. Depending on the amount of overtime I work, this ends up being up to 2/3s of my paycheck. As a result, I've only put $4k into my IRA this year. I'm not sure I'm going to be able to max it without working a ton more overtime, or selling some funds in my brokerage account. My brokerage account is set up with specific lots, so I can sell shares that way. Fortunately, all of the lots of VXUS are in the green. If selling some VXUS from my brokerage, I assume I should sell the shares that are long-term capital gains, but should I sell the ones with the most gains, or the ones with the least gains? Does it make much difference?
A Random Fellow
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Re: Sell in Taxable Brokerage to fund IRA?

Post by A Random Fellow »

Sell long-term capital gains with the least amount of gains first. That realizes the least amount of tax burden possible.
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retiredjg
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Re: Sell in Taxable Brokerage to fund IRA?

Post by retiredjg »

I suggest that you rethink your plan. Filling both a 401k and a 457 can be attractive, but is often not a person's best choice. There are exceptions.

Do you really need to fill both? Are you sure? What type of IRA do you wish to put money in? Is the 457 governmental or non-governmental? Is there a pension involved?

No matter what the circumstances, I would NOT sell in taxable to fund a traditional IRA except as the first step of a backdoor Roth transaction.
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RanchHand
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Re: Sell in Taxable Brokerage to fund IRA?

Post by RanchHand »

retiredjg wrote: Mon Sep 20, 2021 10:56 am I suggest that you rethink your plan. Filling both a 401k and a 457 can be attractive, but is often not a person's best choice. There are exceptions.

Do you really need to fill both? Are you sure? What type of IRA do you wish to put money in? Is the 457 governmental or non-governmental? Is there a pension involved?

No matter what the circumstances, I would NOT sell in taxable to fund a traditional IRA except as the first step of a backdoor Roth transaction.
Why would I not take advantage of all the tax advantaged space available to me in the 457 and 401k?

457 is governmental. Employer also has a defined benefit plan that I'll be vested in next year.
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RanchHand
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Re: Sell in Taxable Brokerage to fund IRA?

Post by RanchHand »

joe_the_buckeye wrote: Mon Sep 20, 2021 10:55 am Sell long-term capital gains with the least amount of gains first. That realizes the least amount of tax burden possible.
Won't I just be kicking that tax-burden down the road? My tax rate should be pretty low this year thanks to more than half of my income directed to retirement pre-tax. Might it be better to get those gains taxed now?
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jeffyscott
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Re: Sell in Taxable Brokerage to fund IRA?

Post by jeffyscott »

RanchHand wrote: Mon Sep 20, 2021 11:15 am
joe_the_buckeye wrote: Mon Sep 20, 2021 10:55 am Sell long-term capital gains with the least amount of gains first. That realizes the least amount of tax burden possible.
Won't I just be kicking that tax-burden down the road? My tax rate should be pretty low this year thanks to more than half of my income directed to retirement pre-tax. Might it be better to get those gains taxed now?
If you will be in the 0% bracket for cap gains, then you can sell whatever has the most, with no tax (at least Federal).

If not, then you do have until next April to fund the IRA and if you are not doing so already, it would certainly make sense to at least use the taxable dividends to fund the IRA. Beyond that maybe hold off, in case of a market decline between now and then?
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retiredjg
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Re: Sell in Taxable Brokerage to fund IRA?

Post by retiredjg »

RanchHand wrote: Mon Sep 20, 2021 11:12 am
retiredjg wrote: Mon Sep 20, 2021 10:56 am I suggest that you rethink your plan. Filling both a 401k and a 457 can be attractive, but is often not a person's best choice. There are exceptions.

Do you really need to fill both? Are you sure? What type of IRA do you wish to put money in? Is the 457 governmental or non-governmental? Is there a pension involved?

No matter what the circumstances, I would NOT sell in taxable to fund a traditional IRA except as the first step of a backdoor Roth transaction.
Why would I not take advantage of all the tax advantaged space available to me in the 457 and 401k?

457 is governmental. Employer also has a defined benefit plan that I'll be vested in next year.
There is probably no harm in filling multiple tax-deferred accounts for a few years, especially if you need to play catch up. Or if there is only 1 work plan for a couple. But filling multiple accounts year after year can result in a very large tax-deferred balance in retirement and most of that money is not needed in retirement.

Those tax-deferred chickens eventually come home to roost in the form of RMDs at age 72 and after. You will be forced to remove a certain percentage of your tax-deferred account each year (the percentage goes up each year) and pay tax on it...whether you need the money or not. Super-savers who have filled extra accounts and not spent that money by 72 or converted it to Roth can be pushed into tax brackets higher than while working. :shock: It is essentially a "tax bomb".

Things that make this worse are starting early, working later in life, living well below your means, having SS in addition to the pension, and so on.

My observation is that it would be better to fill one tax-deferred account and use the other account for Roth savings. Obviously, there is almost nothing known about your situation, but this potential problem is something you should be aware of and keep and eye on.
sailaway
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Re: Sell in Taxable Brokerage to fund IRA?

Post by sailaway »

Take a look at the actual lots. We have had circumstances where something invested two months ago will result in lower tax burden than anything invested over a year ago. I suspect this particularly true with how the market has been behaving lately. Since we expect to spend much of our pending retirement in the 0% LTCG bracket, we don't concern ourselves too much with the pay now vs pay later calculations. If you are very far from retirement or don't expect low expenses, that may be different for you.
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RanchHand
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Re: Sell in Taxable Brokerage to fund IRA?

Post by RanchHand »

retiredjg wrote: Mon Sep 20, 2021 10:56 am Those tax-deferred chickens eventually come home to roost in the form of RMDs at age 72 and after. You will be forced to remove a certain percentage of your tax-deferred account each year (the percentage goes up each year) and pay tax on it...whether you need the money or not. Super-savers who have filled extra accounts and not spent that money by 72 or converted it to Roth can be pushed into tax brackets higher than while working. :shock: It is essentially a "tax bomb".
This is the piece that I had not considered. Thank you. I guess the benefit of using the 457 plan then is that I can withdraw from that first if I retire early since it isn't subject to the 10% early withdrawal penalty.
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retiredjg
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Re: Sell in Taxable Brokerage to fund IRA?

Post by retiredjg »

Yes, this is just another example of kicking the tax can down the road.

A certain amount of that is a good plan. But if you do not actually spend that tax-deferred money money in retirement, the strategy can backfire. You may (or may not) be putting too much into tax-deferral, hard to say on limited information.

If the 401k has a Roth option, I'd use traditional 457 and Roth 401k and not worry about the IRA at all.
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grabiner
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Re: Sell in Taxable Brokerage to fund IRA?

Post by grabiner »

It's probably a good idea, because this is tax you were going to pay anyway.

Suppose you bought stock for $4K and you now sell it for $6K to fund a Roth IRA. You will pay tax of $300 on the $2K capital gain, losing 5% to taxes. However, you can hold the same stock in the Roth IRA and get tax-free growth until you spend the money (or up to ten years after your death if your heirs inherit the Roth IRA). If you kept the stock in your taxable account, you would eventually lose more than 5%, as you would pay taxes on dividends, and on capital gains when you sell.

A possible exception would be if you intend never to sell the stock. If you give it to charity, or die and leave it to your heirs, there will be no capital-gains tax due. You will still pay dividend tax as long as you continue to hold the stock, so the IRA still comes out ahead if the term is long enough.
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LeeMKE
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Re: Sell in Taxable Brokerage to fund IRA?

Post by LeeMKE »

Retirement account contributions are use it or lose it.

We don't know the age of OP, but I was rabid about stuffing every nickel I could get into these tax deferred accounts to compound tax free for years. Dealing with the taxes was less of a concern than minimizing costs and taxes so my savings could grow as fast as possible.

That said, your tax bracket is low enough that I'd fund Roth by selling some of your taxable account. You can always take the contribution out without penalty (after 5 years) and gains will compound tax free for the rest of your career.
The mightiest Oak is just a nut who stayed the course.
tashnewbie
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Re: Sell in Taxable Brokerage to fund IRA?

Post by tashnewbie »

LeeMKE wrote: Tue Sep 21, 2021 1:16 pm That said, your tax bracket is low enough that I'd fund Roth by selling some of your taxable account. You can always take the contribution out without penalty (after 5 years) and gains will compound tax free for the rest of your career.
Direct Roth IRA contributions are always tax- and penalty-free, at any time. No need to wait 5 years.

Taxable portions of Roth conversion principal have to season for 5 years to avoid a penalty.
tashnewbie
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Re: Sell in Taxable Brokerage to fund IRA?

Post by tashnewbie »

Sounds like you're eligible to make direct Roth IRA contributions.

Can you make $2k of contributions between now and April 15, 2022?

If you can, that's what I would do.
Fat Tails
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Re: Sell in Taxable Brokerage to fund IRA?

Post by Fat Tails »

I might do it to fund a Roth IRA, especially if you can take some capital gains tax free, or take those assets that currently have a loss.

I wouldn't do it to fund a Traditional IRA.

Congrats in your great savings rate. :beer
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