Debt pay off with taxable stocks or ira?

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shareholder01
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Joined: Sun Feb 06, 2011 11:18 am

Debt pay off with taxable stocks or ira?

Post by shareholder01 » Mon Sep 24, 2018 9:20 am

Trying to decide whether to sell stock and take capital gains hit in taxable account or withdraw from traditional IRA to pay down $80k credit card and brokerage account debt. No state taxes on IRA where I live, but our state taxes cap gains as income (4.95%). So selling stock, get hit with 15% cap gains plus 4.95% state tax plus 3.8% net investment tax.

Taking from IRA would be 24% federal income tax, no state tax. I'm in early 60s (no pre-payment penalty) and have + $2 m in traditional IRA.
One concern is that growing IRA balance could push me into a higher tax bracket after 70. So sell stocks from taxable account or take from IRA?

Thanks for considering this question.

Gill
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Re: Debt pay off with taxable stocks or ira?

Post by Gill » Mon Sep 24, 2018 9:34 am

With a $2M+ IRA and presumably other assets I would think you could amortize such a debt without doing either.
Gill

afan
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Re: Debt pay off with taxable stocks or ira?

Post by afan » Mon Sep 24, 2018 11:24 am

May want to look at the credit card and brokerage debt separately. CC debt is usually high interest rate and getting that paid off quickly would be a priority. Brokerage debt might be a lower rate and the advantage of paying it off would be less. Paying down the credit card debt could even make sense if you had to borrow the money on a HELOC, from the broker or some other low rate source.

If you have enough cash flow to pay down the CC debt in a short period that might be best. Then work on lower interest debt.

Between IRA and taxable capital gains, it seems taking from the IRA would involve slightly higher taxes but would also end the tax deferral on the amount taken out.

You would have to compare current and anticipated future tax rates to decide whether reducing your traditional IRA is a good move. Note you can still do that through Roth conversions and get tax free accumulation.
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delamer
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Re: Debt pay off with taxable stocks or ira?

Post by delamer » Mon Sep 24, 2018 11:52 am

Could you distribute the withdrawals between the two accounts to reduce the tax hit?

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grabiner
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Re: Debt pay off with taxable stocks or ira?

Post by grabiner » Mon Sep 24, 2018 7:18 pm

I would prefer to sell the stock. If you remain in your current tax bracket, you will lose the same percentage of your IRA to taxes whenever you make the withdrawal. But you will lose a larger percentage of your taxable account to taxes if you wait, both because you will owe more taxes on dividends and because your capital gain will become a larger fraction of the balance.

Once the debt is gone, you should probably be converting your traditional IRA to a Roth IRA up to the top of the 24% bracket every year until RMDs start. This will avoid the risk that RMDs will push you into a higher bracket, and even if you remain in the same bracket, the 24% bracket is scheduled to become a 28% bracket (and the 22% bracket is scheduled to become a 25% bracket) in 2026. And as above, pay any tax on the conversions by selling taxable stock.
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shareholder01
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Re: Debt pay off with taxable stocks or ira?

Post by shareholder01 » Tue Sep 25, 2018 8:46 am

Thanks all for your thoughtful replies.

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