Tax impact on selling ETFs in taxable account

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brobinson2000
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Tax impact on selling ETFs in taxable account

Post by brobinson2000 » Mon Mar 12, 2018 7:19 am

I'm married, 55 years old with a pension gross income of 61,000 . My portfolio consists of approximately 100,000 in cash, 270,000 in taxable brokerage account, 320,000 in tax deferred 457 plan, and 40,000 in Roth IRAs. We're considering purchasing a new home (currently renting). The cost of the new home could be as much as 450,000.
My question is, in what order should I withdraw the money for the purchase? What are the tax implications?

livesoft
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Re: Tax impact on selling ETFs in taxable account

Post by livesoft » Mon Mar 12, 2018 7:23 am

It depends. If the $270,000 of ETFs in the taxable account has a cost basis of $470,000, then selling them to get $270,000 will reduce your taxes for many years to come.
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Iliketoridemybike
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Re: Tax impact on selling ETFs in taxable account

Post by Iliketoridemybike » Mon Mar 12, 2018 7:23 am

Sell anything with a loss first, tax loss harvesting, than cash.

Gill
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Re: Tax impact on selling ETFs in taxable account

Post by Gill » Mon Mar 12, 2018 8:29 am

I know you didn’t ask the question, but are you sure you can afford the house?
Gill

michaeljc70
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Re: Tax impact on selling ETFs in taxable account

Post by michaeljc70 » Mon Mar 12, 2018 11:02 am

If you aren't in a hurry, it will probably help if you stagger the sales/withdrawals over two years (or more if you can wait). For example, you can sell/withdraw part in Dec, part in Jan and buy the home after that.

The taxes on the taxable account will depend on the basis as someone else pointed out. The taxes on the tax deferred account will be on the entire withdrawal. If you withdraw from the Roth, that would be tax free (potentially). I would use the money from the taxable account first and then the tax deferred.

As someone else implied, this seems like it will be eating up most of your savings.

brobinson2000
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Re: Tax impact on selling ETFs in taxable account

Post by brobinson2000 » Mon Mar 12, 2018 7:38 pm

michaeljc70 wrote:
Mon Mar 12, 2018 11:02 am
If you aren't in a hurry, it will probably help if you stagger the sales/withdrawals over two years (or more if you can wait). For example, you can sell/withdraw part in Dec, part in Jan and buy the home after that.

The taxes on the taxable account will depend on the basis as someone else pointed out. The taxes on the tax deferred account will be on the entire withdrawal. If you withdraw from the Roth, that would be tax free (potentially). I would use the money from the taxable account first and then the tax deferred.

As someone else implied, this seems like it will be eating up most of your savings.
I understand the logic of taking some in 2018, and some in 2019...that makes sense...to stay in the 12% taxable bracket

The money in the taxable account came from our the sale of our previous home in 2013...The cost basis is about 200,000 with long term capital gains of about 70,000. Am I correct that I could liquidate the entire 270,000, and it would only be capital gains taxes...Since I'm in the 12% tax bracket, I think the capital gains would be $0

I also understand the I would be using up to 450,000 of my 750,000...but I can easily survive on my $61,000 pension (w COLA). In 12 years, I will also begin collecting SS.

Is my thinking correct??

brobinson2000
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Re: Tax impact on selling ETFs in taxable account

Post by brobinson2000 » Mon Mar 12, 2018 7:43 pm

Gill wrote:
Mon Mar 12, 2018 8:29 am
I know you didn’t ask the question, but are you sure you can afford the house?
Gill
Gill,
Good question...I'm also considering a mortgage, and the banker has pre-qualified us for 450,000 mortgage based solely on my 61,000 pension income. We have no other debt obligations.

brobinson2000
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Re: Tax impact on selling ETFs in taxable account

Post by brobinson2000 » Mon Mar 12, 2018 7:45 pm

livesoft wrote:
Mon Mar 12, 2018 7:23 am
It depends. If the $270,000 of ETFs in the taxable account has a cost basis of $470,000, then selling them to get $270,000 will reduce your taxes for many years to come.
The cost basis is about $200,000

livesoft
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Re: Tax impact on selling ETFs in taxable account

Post by livesoft » Mon Mar 12, 2018 7:50 pm

brobinson2000 wrote:
Mon Mar 12, 2018 7:38 pm
The cost basis is about 200,000 with long term capital gains of about 70,000. Am I correct that I could liquidate the entire 270,000, and it would only be capital gains taxes...Since I'm in the 12% tax bracket, I think the capital gains would be $0
Don't forget that the $70,000 is income (and thus added to existing adjusted gross income and flows to taxable income) , therefore if you have other income, maybe the $70,000 would bump you above the 12% tax bracket.

A good way to see tax consequences is to fill out a tax return with whatever assumptions are closest to what you will do. If you don't now what you will do, then fill out a tax return 3 or 4 or 5 different possibilities.
Last edited by livesoft on Mon Mar 12, 2018 7:53 pm, edited 1 time in total.
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Gill
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Re: Tax impact on selling ETFs in taxable account

Post by Gill » Mon Mar 12, 2018 7:51 pm

brobinson2000 wrote:
Mon Mar 12, 2018 7:43 pm
Gill wrote:
Mon Mar 12, 2018 8:29 am
I know you didn’t ask the question, but are you sure you can afford the house?
Gill
Gill,
Good question...I'm also considering a mortgage, and the banker has pre-qualified us for 450,000 mortgage based solely on my 61,000 pension income. We have no other debt obligations.
Seems like a big nut to carry. Payments on a 30 year mortgage would be about $2,100 a month, $25,200 a year or a large share of your pension.
Gill

michaeljc70
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Re: Tax impact on selling ETFs in taxable account

Post by michaeljc70 » Mon Mar 12, 2018 9:53 pm

brobinson2000 wrote:
Mon Mar 12, 2018 7:38 pm
michaeljc70 wrote:
Mon Mar 12, 2018 11:02 am
If you aren't in a hurry, it will probably help if you stagger the sales/withdrawals over two years (or more if you can wait). For example, you can sell/withdraw part in Dec, part in Jan and buy the home after that.

The taxes on the taxable account will depend on the basis as someone else pointed out. The taxes on the tax deferred account will be on the entire withdrawal. If you withdraw from the Roth, that would be tax free (potentially). I would use the money from the taxable account first and then the tax deferred.

As someone else implied, this seems like it will be eating up most of your savings.
I understand the logic of taking some in 2018, and some in 2019...that makes sense...to stay in the 12% taxable bracket

The money in the taxable account came from our the sale of our previous home in 2013...The cost basis is about 200,000 with long term capital gains of about 70,000. Am I correct that I could liquidate the entire 270,000, and it would only be capital gains taxes...Since I'm in the 12% tax bracket, I think the capital gains would be $0

I also understand the I would be using up to 450,000 of my 750,000...but I can easily survive on my $61,000 pension (w COLA). In 12 years, I will also begin collecting SS.

Is my thinking correct??
I think you are on the right path. But your pension income would be considered in calculating the taxable gain. With 61k in pension income, you cannot get the $70k capital gain tax free (BTW....if it isn't long term, entirely different discussion). If you aren't in a hurry, you can take some each year. Depending on your exact circumstances (dividend and other income), some may be tax free. I'm also not sure what state you are in. I took advantage in 2017 and took a $33k long term capital gain because I would pay zero federal taxes. However, I had to pay state taxes on it.

brobinson2000
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Re: Tax impact on selling ETFs in taxable account

Post by brobinson2000 » Tue Mar 13, 2018 9:08 am

livesoft wrote:
Mon Mar 12, 2018 7:50 pm
brobinson2000 wrote:
Mon Mar 12, 2018 7:38 pm
The cost basis is about 200,000 with long term capital gains of about 70,000. Am I correct that I could liquidate the entire 270,000, and it would only be capital gains taxes...Since I'm in the 12% tax bracket, I think the capital gains would be $0
Don't forget that the $70,000 is income (and thus added to existing adjusted gross income and flows to taxable income) , therefore if you have other income, maybe the $70,000 would bump you above the 12% tax bracket.

A good way to see tax consequences is to fill out a tax return with whatever assumptions are closest to what you will do. If you don't now what you will do, then fill out a tax return 3 or 4 or 5 different possibilities.
Thanks for the clarification. Now I understand that the $70,000 would be added to my AGI, I know I can add about $30,000 to my AGI and still be in the 12% bracket. So does that mean that I could take out $230,000 and still be sitting in the 12% bracket?

brobinson2000
Posts: 29
Joined: Wed May 22, 2013 9:58 am

Re: Tax impact on selling ETFs in taxable account

Post by brobinson2000 » Tue Mar 13, 2018 9:11 am

Gill wrote:
Mon Mar 12, 2018 7:51 pm
brobinson2000 wrote:
Mon Mar 12, 2018 7:43 pm
Gill wrote:
Mon Mar 12, 2018 8:29 am
I know you didn’t ask the question, but are you sure you can afford the house?
Gill
Gill,
Good question...I'm also considering a mortgage, and the banker has pre-qualified us for 450,000 mortgage based solely on my 61,000 pension income. We have no other debt obligations.
Seems like a big nut to carry. Payments on a 30 year mortgage would be about $2,100 a month, $25,200 a year or a large share of your pension.
Gill
Yeah, I understand that, but if I took out a mortgage with 20% down, I would still have about $650,000 in retirement accounts. That would generate a bit of income. Also, my pension has a COLA, so that would also help.

themesrob
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Re: Tax impact on selling ETFs in taxable account

Post by themesrob » Tue Mar 13, 2018 9:17 am

brobinson2000 wrote:
Tue Mar 13, 2018 9:08 am
livesoft wrote:
Mon Mar 12, 2018 7:50 pm
brobinson2000 wrote:
Mon Mar 12, 2018 7:38 pm
The cost basis is about 200,000 with long term capital gains of about 70,000. Am I correct that I could liquidate the entire 270,000, and it would only be capital gains taxes...Since I'm in the 12% tax bracket, I think the capital gains would be $0
Don't forget that the $70,000 is income (and thus added to existing adjusted gross income and flows to taxable income) , therefore if you have other income, maybe the $70,000 would bump you above the 12% tax bracket.

A good way to see tax consequences is to fill out a tax return with whatever assumptions are closest to what you will do. If you don't now what you will do, then fill out a tax return 3 or 4 or 5 different possibilities.
Thanks for the clarification. Now I understand that the $70,000 would be added to my AGI, I know I can add about $30,000 to my AGI and still be in the 12% bracket. So does that mean that I could take out $230,000 and still be sitting in the 12% bracket?
no, your capital gains would be calculated on a per share basis, you would not be able to eat up your cost basis first. Assuming that all of the shares are the same and were purchased at the same time (100 shares each purchased for $2000, now each worth $2700, for example), and you only wanted to incur $30,000 in capital gains this year, you could sell approximately 43 of your shares, equal to $116,100 in proceeds (and $30,100 in capital gains). That's the general principle, but obviously the numbers would be different depending on what is actually in your account.

Keep in mind, of course, that moving above the 12% bracket means only that those additional dollars in income are taxed at the higher marginal rate, not your entire income amount.

livesoft
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Re: Tax impact on selling ETFs in taxable account

Post by livesoft » Tue Mar 13, 2018 9:20 am

brobinson2000 wrote:
Tue Mar 13, 2018 9:08 am
Thanks for the clarification. Now I understand that the $70,000 would be added to my AGI, I know I can add about $30,000 to my AGI and still be in the 12% bracket. So does that mean that I could take out $230,000 and still be sitting in the 12% bracket?
No, it doesn't.
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gostars
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Re: Tax impact on selling ETFs in taxable account

Post by gostars » Tue Mar 13, 2018 10:13 pm

Keep in mind that additional long-term capital gains don't change your tax bracket. They can make you phase out of credits, eligibility for IRA deductions or Roth contributions, and things like that, but any earned income you have always gets taxed first, then LTCG after that. If your AGI would have been $47,000 without the stock sale, and you sell off sufficient stock that you have an additional $40,000 in LTCG, then $30,200 of that comes out tax-free and the remaining $9,800 is taxed at 15%. Also note that the top of the 0% LTCG bracket doesn't match the top of the 12% income tax bracket - LTCG is $100 less for single filers, and $200 less for MFJ.

brobinson2000
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Re: Tax impact on selling ETFs in taxable account

Post by brobinson2000 » Wed Mar 14, 2018 8:50 am

Thanks to everyone for helping me understand this topic. I ran a faux tax filing with several different scenarios, and it makes sense now! :happy

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