Using investments to pay taxes?

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fortysixandtwo
Posts: 107
Joined: Fri Feb 12, 2016 10:40 am

Using investments to pay taxes?

Post by fortysixandtwo » Tue Aug 13, 2019 9:51 am

We owe the IRS money. I screwed up a few years ago. I failed to report some of our capital gains after we liquidated stocks to pay for home renovations (we switched brokers and I just overlooked a 1099). Anyways we owe taxes and penalties. Now I'm trying to figure out how to pay that money. If we liquidate more stock to cover the expense we will owe more capital gains. Would it be smarter to lower our 401K contributions and use new money? It seems like the answer should be obvious to me, but I feel uncertain.

Thanks!

Silk McCue
Posts: 2630
Joined: Thu Feb 25, 2016 7:11 pm

Re: Using investments to pay taxes?

Post by Silk McCue » Tue Aug 13, 2019 10:55 am

If you lower your 401k contributions those dollars will be taxed at your marginal tax rate. You need to analyze the two approaches and see which is the most tax efficient. If you sell out of taxable you will want to choose shares that will result in the least amount of tax being paid due to having lesser gains.

You can also look at using a HELOC (ThirdFederal has the lowest rates in the nation) to pay the bill and pay it back over the next couple of years.

Cheers

SGM
Posts: 3004
Joined: Wed Mar 23, 2011 4:46 am

Re: Using investments to pay taxes?

Post by SGM » Tue Aug 13, 2019 11:14 am

I never lowered my 401k contributions to pay taxes. I felt the tax deferral was too valuable and the money was designated for retirement. If there wasn't enough in my checking account I sold investments with LT capital gains or losses if available to pay income taxes.

Eventually I converted all my tax deferred accounts over several years to Roth accounts and paid taxes the same as described above.

kaneohe
Posts: 5753
Joined: Mon Sep 22, 2008 12:38 pm

Re: Using investments to pay taxes?

Post by kaneohe » Tue Aug 13, 2019 12:55 pm

agree w/ Silk........if you stop contributions to 401K, you will pay your marginal tax rate on ALL of those $; if you sell stocks,
you will pay LTCG rates (presumably; which are typ. less than the marginal rate on ordinary income) on PART of the funds (the gains).

vtjon02
Posts: 28
Joined: Tue May 21, 2019 6:08 pm

Re: Using investments to pay taxes?

Post by vtjon02 » Tue Aug 13, 2019 1:10 pm

fortysixandtwo wrote:
Tue Aug 13, 2019 9:51 am
We owe the IRS money. I screwed up a few years ago. I failed to report some of our capital gains after we liquidated stocks to pay for home renovations (we switched brokers and I just overlooked a 1099). Anyways we owe taxes and penalties. Now I'm trying to figure out how to pay that money. If we liquidate more stock to cover the expense we will owe more capital gains. Would it be smarter to lower our 401K contributions and use new money? It seems like the answer should be obvious to me, but I feel uncertain.

Thanks!
See if you can harvest any losses to offset some of the gains. Capital gains rates are pretty cheap. I wouldn't touch retirement contributions unless there were no other options.

delamer
Posts: 8437
Joined: Tue Feb 08, 2011 6:13 pm

Re: Using investments to pay taxes?

Post by delamer » Tue Aug 13, 2019 1:13 pm

If you would need to lower your contributions to the point that you’d forego any of the employer match, don’t go that route.

In most cases, it probably is better to judiciously sell stocks and pay the LTCG taxes rather than reduce 401(k) contributions (even if your match would not be affected).

Broken Man 1999
Posts: 2935
Joined: Wed Apr 08, 2015 11:31 am

Re: Using investments to pay taxes?

Post by Broken Man 1999 » Tue Aug 13, 2019 3:48 pm

Could you use a 15-18 month no interest credit card?

You might have to pay a 3% fee, but you might not have to use your investment account withdrawals.

If you can pay the bill off in the 15-18 months of no interest, might be just fine.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

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