withdrawing funds from 401(k), Roth IRA or non-retirement funds?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
CFIT
Posts: 35
Joined: Mon Apr 07, 2014 7:57 pm

withdrawing funds from 401(k), Roth IRA or non-retirement funds?

Post by CFIT » Tue Mar 22, 2016 10:50 am

I'm retired, have and pension, and am over 59.5. For 2015, my wife and I squeaked by in the 15% bracket and I'd like to minimize taxes for 2016. I need to withdraw funds to accomplish some projects around the house. I can take funds from a 401(k), my Roth IRA, or non-retirement investments, but I'm not sure which is best from a tax point of view. To my mind:

Non-retirement funds: I'll be taxed on capital gains
Roth IRA: won't be taxed at all (right?)
401(k): money withdrawn will count as income for tax purposes

My inclination is to take money from non-retirement funds and leave the Roth to grow for tax-free withdrawals in the future. From a short term point of view, looking only at taxes for 2016, pulling from the Roth would make sense since it would not be taxed and push us out of the 15% bracket.

Am I looking at this decision in the right way? Is there anything else I should take into consideration?

Thanks!

user5027
Posts: 753
Joined: Sat Jun 16, 2012 8:54 pm

Re: withdrawing funds from 401(k), Roth IRA or non-retirement funds?

Post by user5027 » Tue Mar 22, 2016 11:02 am

Non-retirement funds: I'll be taxed on capital gains


If you stay in the 15% bracket for 2016, long term gains are not taxed.

If over 15%; do you have winners and losers? Sell a combination of both to balance to zero the gain/loss.

Roth IRA: won't be taxed at all (right?)


In general yes, there are different rules for over/under 5 years and contributions/earnings.

DSInvestor
Posts: 10623
Joined: Sat Oct 04, 2008 11:42 am

Re: withdrawing funds from 401(k), Roth IRA or non-retirement funds?

Post by DSInvestor » Tue Mar 22, 2016 11:06 am

Withdrawals from Traditional 401k, Traditional IRA will be taxed as ordinary income.

You can withdraw from taxable in several ways.
1) Do not reinvest dividends. Collect the dividends in cash and use the for spending. You are taxed on the dividends regardless of what you do, so you may as well spend them as an alternative to selling shares and realizing capital gains or withdrawing from retirement accounts.

2) Selling shares. Capital gains tax applies for the net capital gain. If you have unrealized losses, you can use specific share identification to sell the shares with a loss and realize a capital loss. Capital losses can offset capital gains. If you have a net capital loss, up to 3K can be used to reduce ordinary income and the rest of the loss carries forward to next tax year.

3) Return of capital is not taxable in taxable accounts. If you bought shares for $10,000 and the shares increase in value to $11,000 and you sell all 11,000, you realize 1K capital gain and 10K is return of capital.

Edit: The rules for Roth IRA withdrawals are quite tricky. All Roth IRA withdrawals are tax free and penalty free if your Roth IRA passes the 5 yr test and you're 59.5+. If your Roth IRA does not pass the 5 year test, you can still withdraw your Roth IRA contribution basis tax free and penalty free. Roth IRA contribution basis is the total amount of Roth IRA contributions that you've made.

I would look into a combination of collecting dividends from the taxable account and selling shares with unrealized losses before withdrawing from retirement accounts.

If you are receiving ACA premium tax credit or other tax credit, be aware that increasing your AGI may affect those tax credits. Increasing your AGI may also impact the amount of social security benefits that are taxed. Your AGI already includes your dividends and spending them will not affect your AGI. Selling shares for a loss will not increase your AGI but selling for a net capital gain will increase your AGI.
Last edited by DSInvestor on Tue Mar 22, 2016 12:04 pm, edited 2 times in total.

user5027
Posts: 753
Joined: Sat Jun 16, 2012 8:54 pm

Re: withdrawing funds from 401(k), Roth IRA or non-retirement funds?

Post by user5027 » Tue Mar 22, 2016 11:50 am

Withdrawals from Roth IRA are not taxable in your situation.


My understanding is the earnings are not taxed only if the roth passes a 5 year test. Even if over age 59.5, distribution of earnings from a roth less than 5 years old are taxable.

Fairmark.com

Qualified distributions
If you receive a distribution of earnings from your Roth IRA, you’re required to pay tax (and possibly penalties) unless you received a qualified distribution. A qualified distribution is a distribution that satisfies two tests: a five-year test and a type of distribution test. It’s not enough to meet just one of these; both are necessary.

Five-year test
The five-year test is satisfied beginning on January 1 of the fifth year after the first year you establish a Roth IRA. If you established a Roth IRA in 2012, for example, any distribution from a Roth IRA will satisfy the five-year test if the distribution occurs on or after January 1, 2017.

The five-year test is satisfied on January 1 even if you establish your Roth IRA late in the year. In fact, you’re treated as if you established your Roth IRA in the previous year if you make the contribution on or before April 15 and designate it as a contribution for the previous year.

When you meet the five-year test for one Roth IRA, you meet it for all Roth IRAs. For example, suppose you contributed $500 to a Roth IRA in 2012. Three years later you decided to set up another Roth IRA and contribute $2,000. Both IRAs will meet the five-year test on January 1, 2017.

Type of distribution
Even after you meet the five-year test, only certain types of distributions are treated as qualified distributions. There are four types of qualified distributions:

Distributions made on or after the date you reach age 59½.
Distributions made to your beneficiary after your death.
If you become disabled, distributions attributable to your disability.
“Qualified first-time homebuyer distributions.”

A distribution of earnings that fails to meet these tests will be taxable, and may be subject to the 10% early distribution penalty as well.

Spirit Rider
Posts: 6822
Joined: Fri Mar 02, 2007 2:39 pm

Re: withdrawing funds from 401(k), Roth IRA or non-retirement funds?

Post by Spirit Rider » Tue Mar 22, 2016 12:00 pm

user5027 wrote:
Withdrawals from Roth IRA are not taxable in your situation.

My understanding is the earnings are not taxed only if the roth passes a 5 year test. Even if over age 59.5, distribution of earnings from a roth less than 5 years old are taxable.

Yes, but even if the Roth does not pass the 5 year test (less likely for someone 59.5), contributions come out first and are not taxable.

ralph124cf
Posts: 1780
Joined: Tue Apr 01, 2014 11:41 am

Re: withdrawing funds from 401(k), Roth IRA or non-retirement funds?

Post by ralph124cf » Tue Mar 22, 2016 1:04 pm

Keeping taxes low is always nice. As you clearly know, traditional 401(k) withdrawals are fully taxable. For tax planning it is worthwhile to look at all of your future taxes, not just a year or two at a time. I know that it is a long time in the future, but try projecting your RMDs when you turn 70. If these plus SS would put you into the 28% or higher bracket, it might be worthwhile to consider some ROTH conversions each year even if it pushes you into the 25% bracket.

Ralph

OutInThirteen
Posts: 381
Joined: Thu Mar 14, 2013 2:11 pm

Re: withdrawing funds from 401(k), Roth IRA or non-retirement funds?

Post by OutInThirteen » Tue Mar 22, 2016 6:45 pm

I'm in a similar situation. My (small) Federal pension starts this month and my SS starts next month, so I'm down to the wire. To get through next month, with several modest expenses that need to be covered, I'd get up into the 25% bracket if I took all I needed from my 403(b). I'm thinking of taking enough from my Roth IRA to stay in the 15% bracket (based on my projections at the end of March), then at the end of the year, converting as much of my TIRA (if any) back to my Roth IRA as I can to ensure I exactly top out the 15% bracket.

CFIT
Posts: 35
Joined: Mon Apr 07, 2014 7:57 pm

Re: withdrawing funds from 401(k), Roth IRA or non-retirement funds?

Post by CFIT » Wed Mar 23, 2016 4:24 pm

Thanks for the helpful advice and suggestions.

Post Reply