I've got a question about exchanging mutual funds in taxable accounts for cash in IRA, resulting in an overall lower tax drag. This gets into Capital Gains taxes versus Income taxes. Take it easy on me, I’m struggling how to describe my theory.
I’ve searched BH and wiki’s but can’t seem to find any resources like I’m asking for. I’ll try to make this topic concise, but for me it’s a complicated topic to describe.
For starters, I think I have a good understanding of the concepts of exchanging mutual funds in taxable for cash in IRA for a lower tax drag. Here’s the Wiki link of what I’m talking about (Placing cash needs in a tax-advantaged account):
https://www.bogleheads.org/wiki/Placing ... ed_account
So, given that:
• Cash and CDs in taxable accounts have a bad tax drag since it’s taxed at regular Income tax rates.
• Stock Index funds in a taxable account have less tax drag since it’s taxed at the lower Capital Gains tax rates.
• If funds are in a Traditional IRA, it doesn’t matter what fund it’s in, it’s taxed on withdrawal only at regular Income tax rates.
• Interest made on Cash and CDs behind and Trad IRA “firewall” are not taxed until you withdraw. This is important if you want to leave it there because you’re using other money at the moment.
• Capital Gains are not taxed until you sell the Stock Index fund in taxable account.
So here’s the question:
Has anyone made a spreadsheet, or seen a website, that calculates your best options for what to put where at what age?
For example, if I’m 60yrs and can withdraw money from Trad IRA, maybe I should move money out of Trad IRA into taxable so I can invest in Stock Indexes for lower tax rates. Also, by taking money out now, before I get to 73, I can lower my RMD’s and lower the associated tax rate then.
Ideally this “magic” spreadsheet or website would take your:
• Portfolio amount
• Age
• Roth balances
• Trad IRA balances
• Taxable account balances
• Desired AA of stock/bonds/cash, so like 60/30/10
And tell you:
• Withdraw money from Trad IRA and put in taxable, take x per year to minimize taxes on the withdrawals.
• Invest in which funds in which accounts to minimize your taxes.
Or…am I overthinking this?
Say my AA is: 60s/30b/10c.
So simply move towards this:
60% - Stocks – All in taxable accounts (or Roth, since tax free withdrawals)
30% - Bonds – All in Trad IRA (or Roth)
10% - Cash – All in Trad IRA (or Roth)
For some reason this “easy” idea just doesn’t seem right, given all the rules and reasons that IRA’s exist, so I must be missing something.
A small side caveat for stock funds is sometimes there can be some dividends, but there may not be much you could do about that. Also, maybe it’s such a low percent compared to the entire fund it’s not a big issue.
Ideas welcome and feel free to educate or correct my thinking. Thanks!
I’ve searched BH and wiki’s but can’t seem to find any resources like I’m asking for. I’ll try to make this topic concise, but for me it’s a complicated topic to describe.
For starters, I think I have a good understanding of the concepts of exchanging mutual funds in taxable for cash in IRA for a lower tax drag. Here’s the Wiki link of what I’m talking about (Placing cash needs in a tax-advantaged account):
https://www.bogleheads.org/wiki/Placing ... ed_account
So, given that:
• Cash and CDs in taxable accounts have a bad tax drag since it’s taxed at regular Income tax rates.
• Stock Index funds in a taxable account have less tax drag since it’s taxed at the lower Capital Gains tax rates.
• If funds are in a Traditional IRA, it doesn’t matter what fund it’s in, it’s taxed on withdrawal only at regular Income tax rates.
• Interest made on Cash and CDs behind and Trad IRA “firewall” are not taxed until you withdraw. This is important if you want to leave it there because you’re using other money at the moment.
• Capital Gains are not taxed until you sell the Stock Index fund in taxable account.
So here’s the question:
Has anyone made a spreadsheet, or seen a website, that calculates your best options for what to put where at what age?
For example, if I’m 60yrs and can withdraw money from Trad IRA, maybe I should move money out of Trad IRA into taxable so I can invest in Stock Indexes for lower tax rates. Also, by taking money out now, before I get to 73, I can lower my RMD’s and lower the associated tax rate then.
Ideally this “magic” spreadsheet or website would take your:
• Portfolio amount
• Age
• Roth balances
• Trad IRA balances
• Taxable account balances
• Desired AA of stock/bonds/cash, so like 60/30/10
And tell you:
• Withdraw money from Trad IRA and put in taxable, take x per year to minimize taxes on the withdrawals.
• Invest in which funds in which accounts to minimize your taxes.
Or…am I overthinking this?
Say my AA is: 60s/30b/10c.
So simply move towards this:
60% - Stocks – All in taxable accounts (or Roth, since tax free withdrawals)
30% - Bonds – All in Trad IRA (or Roth)
10% - Cash – All in Trad IRA (or Roth)
For some reason this “easy” idea just doesn’t seem right, given all the rules and reasons that IRA’s exist, so I must be missing something.
A small side caveat for stock funds is sometimes there can be some dividends, but there may not be much you could do about that. Also, maybe it’s such a low percent compared to the entire fund it’s not a big issue.
Ideas welcome and feel free to educate or correct my thinking. Thanks!
Statistics: Posted by MoneyIsTime — Thu Mar 21, 2024 9:38 am — Replies 6 — Views 146