Lump sum withdrawal from taxable or Roth?

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Ozonewanderer
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Lump sum withdrawal from taxable or Roth?

Post by Ozonewanderer »

I want to buy a condominium that costs roughly $400k. I have more than that amount in a taxable account and in a Roth IRA individually.

The taxable account is mostly index funds of which 70% are capital gains. If I withdraw the money from the taxable account I would have to pay 15% long term capital gains tax immediately. If I withdraw the money from the Roth IRA, I don't have to pay any tax. However, I will be losing on the tax-free compounded growth of the withdrawal in that Roth IRA.

What is the better option?

Thanks.
niagara_guy
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Re: Lump sum withdrawal from taxable or Roth?

Post by niagara_guy »

Sounds like 42k in taxes if you sell the taxable. I think I would sell the taxable over pulling from Roth (and there are rules about what you can pull from Roth without penalty).

Could you get a mortgage on the property so you don't have to sell assets to buy the property?
Statistical
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Re: Lump sum withdrawal from taxable or Roth?

Post by Statistical »

If you are under 59.5 the most you can pull from the Roth without penalties and taxes is the contributions (and any post-tax conversions and any pre-tax conversions at least five years old).

Any unaged pre-tax conversions would have 10% penalty. Any gains would have 10% penalty plus taxes on the full amount at your marginal tax rate (so catastrophically terrible).

Depending on the amount of gains vs contributions in the roth account that may limit how much you even have access too.
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Re: Lump sum withdrawal from taxable or Roth?

Post by Ozonewanderer »

I am 72 and have had the Roth for a long time.

niagra_guy, can you explain your thinking here:
"Sounds like 42k in taxes if you sell the taxable. I think I would sell the taxable over pulling from Roth"

This was one of my conclusions, but then I asked my accountant, and he said his guideline is to defer paying taxes whenever you can so he suggested taking the money from the Roth.

I guess one of my options is to take half from each account.

I could take a mortgage on the property and I also could take out a home equity loan on my principal residence in FL which has no mortgage. (I did not mention that this condo would be a 2nd home to be near the grandchildren in summer).
Running Bum
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Re: Lump sum withdrawal from taxable or Roth?

Post by Running Bum »

$280K in cap gains is going to trigger NIIT (+3.8%) on at least some of the gains.

Like most such questions, the answer can't be given in a vacuum, but I'd use the Roth if I was in that situation. My heirs would be better off receiving taxable holdings with stepped up basis, as would charities. Also, if I need assisted or memory care later, I can sell taxable holdings and write the medical expenses (assuming they qualify) off against the cap gains. Many others plan to use their tIRA for that, but I'm on track to get mine mostly or fully converted to Roth.

If you see yourself using most or all of your funds in your lifetime, I might sell taxable up to that 3.8% additional tax, and use Roth for the rest.

There are adages that people will say, like save the Roth money until last, or defer taxes as long as possible, but you really want to look at your specific situation, not some one-size-fits-all general advice.
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Re: Lump sum withdrawal from taxable or Roth?

Post by sailaway »

Running Bum wrote: Wed Jun 22, 2022 4:45 pm $280K in cap gains is going to trigger NIIT (+3.8%) on at least some of the gains.

Like most such questions, the answer can't be given in a vacuum, but I'd use the Roth if I was in that situation. My heirs would be better off receiving taxable holdings with stepped up basis, as would charities. Also, if I need assisted or memory care later, I can sell taxable holdings and write the medical expenses (assuming they qualify) off against the cap gains. Many others plan to use their tIRA for that, but I'm on track to get mine mostly or fully converted to Roth.

If you see yourself using most or all of your funds in your lifetime, I might sell taxable up to that 3.8% additional tax, and use Roth for the rest.

There are adages that people will say, like save the Roth money until last, or defer taxes as long as possible, but you really want to look at your specific situation, not some one-size-fits-all general advice.
Your heirs would be able to spread the step up over ten years vs taking it all when you pass, if you leave them Roth.

I still agree that I would split the withdrawal between taxable and Roth to mitigate the tax burden.
joylesshusband
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Re: Lump sum withdrawal from taxable or Roth?

Post by joylesshusband »

Running Bum wrote: Wed Jun 22, 2022 4:45 pm $280K in cap gains is going to trigger NIIT (+3.8%) on at least some of the gains.
It would trigger IRMAA as well.

Pull from the Roth and be happy!

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Running Bum
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Re: Lump sum withdrawal from taxable or Roth?

Post by Running Bum »

sailaway wrote: Wed Jun 22, 2022 5:03 pm

Your heirs would be able to spread the step up over ten years vs taking it all when you pass, if you leave them Roth.
There's no step up on a Roth because there's no basis to step up on. Maybe there are exceptions to that though I don't think so in the OPs case, nor mine.

I think your point is that heirs can get 10 more years of tax-free growth. That's worth something, if they really leave it untouched.
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Re: Lump sum withdrawal from taxable or Roth?

Post by sailaway »

Running Bum wrote: Wed Jun 22, 2022 9:20 pm
sailaway wrote: Wed Jun 22, 2022 5:03 pm

Your heirs would be able to spread the step up over ten years vs taking it all when you pass, if you leave them Roth.
There's no step up on a Roth because there's no basis to step up on. Maybe there are exceptions to that though I don't think so in the OPs case, nor mine.

I think your point is that heirs can get 10 more years of tax-free growth. That's worth something, if they really leave it untouched.
If they take it all out immediately, it is the equivalent of a step up. If they delay withdrawals, they get that step up equivalent at the time of withdrawal.
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Re: Lump sum withdrawal from taxable or Roth?

Post by Ozonewanderer »

Well, I guess if the answer was easy and obvious, I wouldn't be asking all you smart people. I am glad I did!

You have given me a lot to think about and research. Thanks!
Running Bum
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Re: Lump sum withdrawal from taxable or Roth?

Post by Running Bum »

sailaway wrote: Wed Jun 22, 2022 9:22 pm If they take it all out immediately, it is the equivalent of a step up. If they delay withdrawals, they get that step up equivalent at the time of withdrawal.
I don't follow. If I have $100K in a taxable account with $30K basis and sell it, I pay cap gains tax on the $70K profit. If instead I die with it, my heir gets it with stepped up basis of $100K, so they could immediately sell it and have $0 capital gains. Or they can hold it and when they sell they pay tax only on the gains above their stepped up basis of $100K.

If I have $100K in a Roth and sell it, I pay no tax. If I die with it, my heir can sell it pay no tax. I don't see anything here that can be called a stepped up basis or equivalent. Or they can hold it for up to 10 years and let it grow tax free, and when they sell it they pay no tax.

I don't equate tax free growth with stepped up basis. It seems confusing to mix the terms.
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Re: Lump sum withdrawal from taxable or Roth?

Post by McDougal »

At 72, does an RMD (if you are required to take it) play any part in this situation?
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Re: Lump sum withdrawal from taxable or Roth?

Post by Ozonewanderer »

McDougal wrote: Thu Jun 23, 2022 10:41 am At 72, does an RMD (if you are required to take it) play any part in this situation?
Not specifically, I don't think. I have begun taking my RMD's, and I am paying income tax on the whole amount of withdrawals. If I take out more than my RMD, then I will just pay income tax on that incremental amount. I rejected this option out of hand because it creates the highest tax burden.
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Re: Lump sum withdrawal from taxable or Roth?

Post by bloom2708 »

Wait 30 days and see if you still want to buy the condo. :D
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Re: Lump sum withdrawal from taxable or Roth?

Post by Ozonewanderer »

joylesshusband wrote: Wed Jun 22, 2022 5:50 pm
Running Bum wrote: Wed Jun 22, 2022 4:45 pm $280K in cap gains is going to trigger NIIT (+3.8%) on at least some of the gains.
It would trigger IRMAA as well.

Pull from the Roth and be happy!
Help. What is NIIT? What triggers the extra 3.8% tax? My income level or the amount of capital gain?

Also what is NIIT?

Thank you, all
123
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Re: Lump sum withdrawal from taxable or Roth?

Post by 123 »

Take it from taxable and pay the capital gains tax. If you want to avoid taxes don't give up that precious Roth space, it will serve you year after year, to your passing and potentially beyond.

You paid a lot in taxes to get that Roth space. Its likely cheaper to pay the capital gains tax and keep the Roth space.
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Re: Lump sum withdrawal from taxable or Roth?

Post by marcopolo »

Ozonewanderer wrote: Thu Jun 23, 2022 11:09 am
joylesshusband wrote: Wed Jun 22, 2022 5:50 pm
Running Bum wrote: Wed Jun 22, 2022 4:45 pm $280K in cap gains is going to trigger NIIT (+3.8%) on at least some of the gains.
It would trigger IRMAA as well.

Pull from the Roth and be happy!
Help. What is NIIT? What triggers the extra 3.8% tax? My income level or the amount of capital gain?

Also what is NIIT?

Thank you, all
NIIT = Net Investment Income Tax.

it is triggered at MAGI of $200k for individuals, $250k for couples filing jointly. At incomes above that, investment income pays the extra 3.8% tax.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: Lump sum withdrawal from taxable or Roth?

Post by sailaway »

Running Bum wrote: Thu Jun 23, 2022 10:33 am
sailaway wrote: Wed Jun 22, 2022 9:22 pm If they take it all out immediately, it is the equivalent of a step up. If they delay withdrawals, they get that step up equivalent at the time of withdrawal.
I don't follow. If I have $100K in a taxable account with $30K basis and sell it, I pay cap gains tax on the $70K profit. If instead I die with it, my heir gets it with stepped up basis of $100K, so they could immediately sell it and have $0 capital gains. Or they can hold it and when they sell they pay tax only on the gains above their stepped up basis of $100K.

If I have $100K in a Roth and sell it, I pay no tax. If I die with it, my heir can sell it pay no tax. I don't see anything here that can be called a stepped up basis or equivalent. Or they can hold it for up to 10 years and let it grow tax free, and when they sell it they pay no tax.

I don't equate tax free growth with stepped up basis. It seems confusing to mix the terms.
The argument I was replying to was that taxable is better for heirs than Roth. The only difference between the two for an heir that wants to sell immediately is that for a taxable account the heirs' basis is set on the day of death. If the market rises between then and the actual sale, taxes will be owed. If the market falls, losses may be claimed. However, the market goes up more than down. Thus, Roth will tend to be superior, but for those who cash out it will be a close call and there are market conditions where it may not be so.

The tax free growth potential over the following ten years is just another, separate bonus of Roth.
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Re: Lump sum withdrawal from taxable or Roth?

Post by Ozonewanderer »

marcopolo wrote: Thu Jun 23, 2022 11:20 am
Ozonewanderer wrote: Thu Jun 23, 2022 11:09 am
joylesshusband wrote: Wed Jun 22, 2022 5:50 pm
Running Bum wrote: Wed Jun 22, 2022 4:45 pm $280K in cap gains is going to trigger NIIT (+3.8%) on at least some of the gains.
It would trigger IRMAA as well.

Pull from the Roth and be happy!
Help. What is NIIT? What triggers the extra 3.8% tax? My income level or the amount of capital gain?

Also what is NIIT?

Thank you, all
NIIT = Net Investment Income Tax.

it is triggered at MAGI of $200k for individuals, $250k for couples filing jointly. At incomes above that, investment income pays the extra 3.8% tax.
Thanks. I might be close to this trigger.

I made a typo and also meant to ask what is IRMAA?
marcopolo
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Re: Lump sum withdrawal from taxable or Roth?

Post by marcopolo »

Ozonewanderer wrote: Thu Jun 23, 2022 1:13 pm
marcopolo wrote: Thu Jun 23, 2022 11:20 am
Ozonewanderer wrote: Thu Jun 23, 2022 11:09 am
joylesshusband wrote: Wed Jun 22, 2022 5:50 pm
Running Bum wrote: Wed Jun 22, 2022 4:45 pm $280K in cap gains is going to trigger NIIT (+3.8%) on at least some of the gains.
It would trigger IRMAA as well.

Pull from the Roth and be happy!
Help. What is NIIT? What triggers the extra 3.8% tax? My income level or the amount of capital gain?

Also what is NIIT?

Thank you, all
NIIT = Net Investment Income Tax.

it is triggered at MAGI of $200k for individuals, $250k for couples filing jointly. At incomes above that, investment income pays the extra 3.8% tax.
Thanks. I might be close to this trigger.

I made a typo and also meant to ask what is IRMAA?
IRMAA - income-related monthly adjusted amount

It is an additional amount charged for Medicare Part B as ones income goes above several thresholds

https://www.medicareresources.org/medic ... unt-irmaa/
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Re: Lump sum withdrawal from taxable or Roth?

Post by terran »

Ozonewanderer wrote: Thu Jun 23, 2022 1:13 pm I made a typo and also meant to ask what is IRMAA?
How much you pay for Medicare Part B depends on your Income Related Monthly Adjustment Amount (IRMAA).
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Re: Lump sum withdrawal from taxable or Roth?

Post by grabiner »

If you sell from the taxable account, you lose some fraction of that account to capital-gains tax.

If you sell from the Roth and keep the stock in the taxable account, you lose some of the account every year to dividend tax, and will lose a larger fraction of the taxable account to taxes if you sell.

So the question is whether you are likely to eventually sell the taxable account at all. If you expect to leave it to your heirs, it may be better to keep the taxable account and drain the Roth, with the expectation that your heirs will get a stepped-up basis and there will be no capital gain. If you expect to leave it to charity and you have a traditional IRA, it would probably be better to pay taxes on the taxable account, and make the charitable donations as Qualified Charitable Distributions from the traditional IRA.
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Re: Lump sum withdrawal from taxable or Roth?

Post by Ozonewanderer »

grabiner wrote: Sat Jun 25, 2022 7:57 pm If you sell from the taxable account, you lose some fraction of that account to capital-gains tax.

If you sell from the Roth and keep the stock in the taxable account, you lose some of the account every year to dividend tax, and will lose a larger fraction of the taxable account to taxes if you sell.

So the question is whether you are likely to eventually sell the taxable account at all. If you expect to leave it to your heirs, it may be better to keep the taxable account and drain the Roth, with the expectation that your heirs will get a stepped-up basis and there will be no capital gain. If you expect to leave it to charity and you have a traditional IRA, it would probably be better to pay taxes on the taxable account, and make the charitable donations as Qualified Charitable Distributions from the traditional IRA.
Whoah! A lot to think about. Thank you. I have a little time to ponder.

And I want to thank everyone for the heads up about NIIT. I think I would have hit the limit. And looking back on my last year's tax return I discovered that the 3.8% tax is why my taxes were so much higher last year!

I need to consult with you folks more often.
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Re: Lump sum withdrawal from taxable or Roth?

Post by Ozonewanderer »

grabiner wrote: Sat Jun 25, 2022 7:57 pm If you sell from the taxable account, you lose some fraction of that account to capital-gains tax.

If you sell from the Roth and keep the stock in the taxable account, you lose some of the account every year to dividend tax, and will lose a larger fraction of the taxable account to taxes if you sell.

So the question is whether you are likely to eventually sell the taxable account at all. If you expect to leave it to your heirs, it may be better to keep the taxable account and drain the Roth, with the expectation that your heirs will get a stepped-up basis and there will be no capital gain. If you expect to leave it to charity and you have a traditional IRA, it would probably be better to pay taxes on the taxable account, and make the charitable donations as Qualified Charitable Distributions from the traditional IRA.
Whoah! A lot to think about. Thank you. I have a little time to ponder.

And I want to thank everyone for the heads up about NIIT. I think I would have hit the limit. And looking back on my last year's tax return I discovered that the 3.8% tax is why my taxes were so much higher last year!

I need to consult with you folks more often.
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Re: Lump sum withdrawal from taxable or Roth?

Post by trek83 »

bloom2708 wrote: Thu Jun 23, 2022 11:06 am Wait 30 days and see if you still want to buy the condo. :D
I’m with bloom2708 - this is a great thought.

And why not rent something for the 2-3 months you wish to be there ?

Live in an RV at a nearby campground ?

Seems like a big expense, plus maintenance, taxes, insurance , etc…..

But I don’t know your situation.
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Re: Lump sum withdrawal from taxable or Roth?

Post by arcticpineapplecorp. »

yes, i agree with trek83. can you just rent a place for a few months? My grandparents moved to florida but used to visit us up north in the summer because it was too hot in Florida and would rent a furnished apt for 3 months. that would be much cheaper in the long run and have no tax implications.
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Re: Lump sum withdrawal from taxable or Roth?

Post by suemarkp »

Based on your current income/RMD/interest/dividends, do you have any headroom in the 0% long term capital gain (LTCG) bucket? If not, then I'd probably take from taxable staying just under the IRMAA and NIIT thresholds (IRMAA would hit you first, but maybe you're OK with crossin one IRMAA tier). Use Roth for the rest.

What is the cost basis method of your taxable account? If it is Spec ID (or similar term based on brokerage), you can pick the shares to cash out and choose ones with the lowest LTCG. If it is FIFO or Average Cost, you may be able to change it or maybe not. You want your taxable brokerage cost basis to always be SPEC ID to support tax loss and tax gain harvesting.

Finally, if you can plan purchasing a home, the ideal solution is to start pulling from accounts well in advance to break up the withdraws and store it somewhere where you won't get killed on taxes (or tax gain harvest to reset the basis instead of withdrawing). Even better is to buy in the spring and take some money out one tax year (December) and then again in the next year (Jan/Feb) to split the tax across 2 years.
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