Withdrawals from a taxable account - tax question

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Indianrock
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Withdrawals from a taxable account - tax question

Post by Indianrock »

We have our traditional IRAs in Vanguard mutual funds but once RMDs started a few years ago, much of those went to a taxable account at vanguard. I've always paid taxes on the dividends the taxable account earned ( it's all VTSAX Vanguard Total Stock Market Index Fund ) but have never withdrawn from the fund. Taxes on withdrawals from such an account would be capital gains I presume and depend on how much is withdrawn and annual income?
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Wiggums
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Re: Withdrawals from a taxable account - tax question

Post by Wiggums »

If you are taking a distribution from the IRA:

If you held your shares for one year or less, then profits from the sale will be taxed as short-term capital gains. If you held your shares for more than one year before selling them, the profits will be taxed at the lower long-term capital gains rate. (0, 15%, 20%)
Last edited by Wiggums on Thu Dec 08, 2022 6:16 am, edited 2 times in total.
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livesoft
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Re: Withdrawals from a taxable account - tax question

Post by livesoft »

It is not so much "withdrawals", but selling something even if you leave the money in a settlement account as cash in a money market fund or use it to buy shares of something.

Please read IRS Publication 550 Investment Income and Expenses (Including Capital Gains and Losses) for more information.
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Indianrock
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Re: Withdrawals from a taxable account - tax question

Post by Indianrock »

Thanks for the tax document link. Yes I should think of this is as a sale of shares. You can probably tell I don't do individual stocks and this annual IRA to taxable (MF) account is pretty much the sum total of my "trading."
Since the shares in the taxable account have grown as I took RMDs since around 2018 I'm not sure how I'll trace time held.
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galawdawg
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Re: Withdrawals from a taxable account - tax question

Post by galawdawg »

Distributions from traditional IRAs are taxed as ordinary income. That includes your RMD.

If you take your IRA distributions as an "in-kind" transfer to a taxable account, that distribution resets the basis of those particular shares to the new cost basis as of the date of transfer. When you ultimately sell those shares, gains are capital gains, losses are capital losses. Anything held for more than a year is long-term gain (or loss), otherwise it is short-term gain (or loss).

For example, you need to take a $10k RMD from your traditional IRA. Within your IRA you have many shares of VTSAX with a cost-basis of $25.00/share. You decide to take your RMD as an "in-kind" distribution so you transfer one hundred (100) shares of VTSAX with a NAV of $100.00/share from your traditional IRA to your taxable brokerage account. You'll be taxed on $10,000 of ordinary income.

A few years later, you sell those one hundred (100) shares of VTSAX in your taxable account which now have a NAV of $120.00/share. Even though you purchased the shares for $25.00/share the basis reset to $100.00/share when you took them as a distribution from your traditional IRA. Therefore, you'll only be taxed on the gain...$2,000 of long-term capital gains.

Hope that makes sense!
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galawdawg
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Re: Withdrawals from a taxable account - tax question

Post by galawdawg »

Indianrock wrote: Thu Dec 08, 2022 6:27 am Since the shares in the taxable account have grown as I took RMDs since around 2018 I'm not sure how I'll trace time held.
You should be able to look at the transaction history for your taxable account at your brokerage and see the date(s) each share or group of shares was acquired whether purchased, transferred in from your IRA or as a dividend reinvestment. If necessary you can specify which lot(s) you want to sell to restrict your gains/losses to long-term gains/losses...just select shares held for more than one year.
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Indianrock
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Re: Withdrawals from a taxable account - tax question

Post by Indianrock »

Perfect, thanks. And from pub 550:

"Form 1099-B. If you sold property such as
stocks, bonds, mutual funds, or certain commodities through a broker during the year, the
broker should send you, for each sale, a Form
1099-B, Proceeds From Broker and Barter Exchange Transactions. You should receive the
Form 1099-B for 2021 by February 15, 2022. It
will show the gross proceeds from the sale. The
IRS will also get a copy of Form 1099-B from
the broker.
Use the Form 1099-B received from your
broker to complete Form 8949, Sales and Other
Dispositions of Capital Assets. If you sold a covered security in 2021, your broker will send you
a Form 1099-B that shows your basis
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livesoft
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Re: Withdrawals from a taxable account - tax question

Post by livesoft »

Set your Cost Basis Method to Specific Identification. All brokerages including Vanguard can display your Cost Basis and Date(s) Acquired. It is just a matter of getting on your computer and logging in to explore the interface that each financial institution uses.
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Indianrock
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Re: Withdrawals from a taxable account - tax question

Post by Indianrock »

Awesome. An aspect I've just never looked into.
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rkhusky
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Re: Withdrawals from a taxable account - tax question

Post by rkhusky »

Vanguard's default cost basis method is Average Cost. If you sell from a fund under Average Cost, all prior shares are locked into Average Cost. Under Average Cost, the oldest shares are sold first.

Since you have not sold from VTSAX in your taxable account, you should be able to change it to Specific ID and have that apply to all the shares, which will allow you to choose which shares to sell.
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Re: Withdrawals from a taxable account - tax question

Post by Indianrock »

Thank you
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dbr
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Re: Withdrawals from a taxable account - tax question

Post by dbr »

You can withdraw money from a holding of a fund such as VTSAX by a couple of different means:

1. Dividends and/or capital gains distributions can be directed to cash or some other investment rather than reinvested. These are taxable income either way.

2. You can sell shares of VTSAX with the proceeds going to some account somewhere or used in some way. In this case the short or long term capital gain is taxable income. How much that gain is depends on how you set the basis accounting method. The most flexible and preferred way is to select specific ID and sell the exact tax lots you want to sell. Note the gain can be negative, meaning a loss. This is also taxable in the sense that it can offset other gains or ordinary income following the rules for applying losses to offset other income.
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Indianrock
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Re: Withdrawals from a taxable account - tax question

Post by Indianrock »

Nice to have options. I'll check out those "Specific ID" options next time I log in.
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Re: Withdrawals from a taxable account - tax question

Post by dbr »

Indianrock wrote: Thu Dec 08, 2022 5:16 pm Nice to have options. I'll check out those "Specific ID" options next time I log in.
It is a setting at your broker that you want to find and elect the way you want it. Another setting to be chosen is whether to reinvest or pay out dividend and capital gain distribution. Note one consequence of reinvesting dividends is that each reinvestment is actually a purchase and creates a new tax lot. This can be helpful to give you more choices later on or uncomfortable because the list gets so long. Note that if you have already sold some shares under average basis accounting you can't just change that later.
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Indianrock
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Re: Withdrawals from a taxable account - tax question

Post by Indianrock »

My "broker" is me plus the Vanguard website. Possibly add Bogleheads :-)
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dbr
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Re: Withdrawals from a taxable account - tax question

Post by dbr »

Indianrock wrote: Fri Dec 09, 2022 12:40 pm My "broker" is me plus the Vanguard website. Possibly add Bogleheads :-)
The specifics I am talking about setting determine how Vanguard (your broker) arrives at values for the cost basis of what you sell. It is not you, a website, or Bogleheads that look up those values but rather the back office accounting done at the broker that produces a report to the IRS that contains the investment data that you will enter on your tax return. This is specific accounting detail and not some general interaction.

It might be a good idea to walk through preparing a tax return Form 1040 that includes capital gains so that you are familiar with the 1099 forms, Schedule D, and Form 8949. There is also the Qualified Dividends and Capital Gains Worksheet and, in case you have carryover losses from previous years the Carryover Loss Worksheet.

This is all very technical but it is the answer to what happens when one sells shares to take a withdrawal.
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Indianrock
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Re: Withdrawals from a taxable account - tax question

Post by Indianrock »

I appreciate your response.. it's not certain that I'm going to be selling any of those shares anytime soon ..in fact in an ideal world that would be left to my heirs...but I do use TurboTax it's pretty good but sometimes takes me down some rabbit holes.
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dbr
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Re: Withdrawals from a taxable account - tax question

Post by dbr »

Indianrock wrote: Fri Dec 09, 2022 1:22 pm I appreciate your response.. it's not certain that I'm going to be selling any of those shares anytime soon ..in fact in an ideal world that would be left to my heirs...but I do use TurboTax it's pretty good but sometimes takes me down some rabbit holes.
Generally you can download the Vanguard 1099 and Turbotax will fill in the forms. Looking through the forms will allow you to see why the tax is what it is, and it does depend on a lot of things.

For you the key is to know the cost basis for each tax lot and sell to best advantage.

Planning not to sell anything is wonderful when you can and you want that money to go to someone else. In that case you want to understand that cost basis is stepped up at death so the tax liability goes away. It is also useful to know that you can gift appreciated shares to bona-fide tax exempt entities (charities and foundations) and any appreciation ends up untaxed.
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