Tax Implications, Broker vs. IRA Account

Managing your TSP and alternate investment options after retirement or separation from service.

Moderator: Aitrus

Post Reply
User avatar
MakeMe$$$$
Posts: 772
Joined: Tue Aug 23, 2011 10:12 pm

Tax Implications, Broker vs. IRA Account

Post by MakeMe$$$$ »

OK...I may have and either an epiphany or a brain fart. LOL If you get through this post and see anything I've got wrong or missed...chime in.

Long post warning... :shock:

I rolled over my TSP to a Fidelity IRA a little over a week ago. I also have a standard brokerage that I opened up a little over a year ago.

My plan was the I would slowly transfer funds from the IRA to the brokerage account and with the recent tax overhaul I had room to do so without busting into the next higher tax bracket. Part of my thinking process was that if something happened to me that Sandee wouldn't have to deal with the significant tax implications of recovering money from the IRA. It would also allow me to eventually control all investments in one account.

However, I've had a very good start in my brokerage account with over $2500 of capital gains. This has already challenged my original plan for additional tax withholdings from our income to cover capital gains. So, I have the choice to make further increases my pension's withholdings or start filing quarterly estimated tax on those capital gains. Regardless of the methods, this could be a cash flow issue if I don't want to use cash funds that are in savings or programmed to go to savings.

So, here are some thoughts on pros and cons of each account.

IRA Pros:
1. NO capital gains taxes so there is no impact on current cash flow from retirement income.
2. Withdrawal of funds can have tax payments withheld which also eliminates the impact on current cash flow.
3. Even if I get to the point of RMDs I can have tax withheld to negate any cash flow problems.
4. The IRA can be controlled by Sandee (surviving spouse) without any immediate tax implication.
5. (MAYBE...looking for more info on this) I don't think there are any complicated tax prep issues. Since I won't make any further contributions I would only have tax forms to file on years of any distribution. Basically, I get a single 1099-R from Fidelity outlining contributions and withdrawals. (I will get a 5498 for this year because of the roll over)

IRA Cons:
1. I can't add any money to it except through successful trading and dividend payouts. (I ain't going back to work!)
2. If the funds are needed immediately then it would take the maximum tax hit and if that busts us up to the next tax bracket that impact gets compounded.
3. Loss of advantage of long term capital gains 15% tax rate since all withdrawals are taxed at ordinary income rate of 22% for us. (Unless I am missing something.

Brokerage Pros:
1. Only capital gains and dividends are taxed.
2. Withdrawals of cash (not resulting from capital gains) do not have any tax implications.
3. I can add funds out of income cash flow.
4. Total liquidation of holdings to withdraw all funds would only create a need to pay tax on capital gains generated from those sales.

Brokerage Cons:
1. Need to plan for tax implications of capital gains/losses & dividends.
2. More complex tax preparations than IRA. (Maybe not enough to make a difference.)
Don
Rolled over to Fidelity 2/24/18.
Fantasy still playing with Daily Strategy 12767.

User avatar
ArrieS
Posts: 1072
Joined: Sun Aug 05, 2012 10:56 am

Re: Tax Implications, Broker vs. IRA Account

Post by ArrieS »

Did you think about rolling the amount you would have withdrawn into a ROTH IRA instead of a brokerage?

You don't have to roll over the whole account. You can roll over parts of it and just pay tax on those portions moved.

You keep the tax advantage and if you are worried about taxes Sandee can withdrawal that money at a later date tax-free.
OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February. - Pudd'nhead Wilson's Calendar

User avatar
evilanne
Posts: 1886
Joined: Thu May 14, 2015 6:52 pm

Re: Tax Implications, Broker vs. IRA Account

Post by evilanne »

I think the idea of planned conversions to Roth makes sense, especially for those who are married. Take a look at future income for both you and spouse in the event that one of you die and look at the tax bracket for Single filing status.

As far as withholdings, it is real easy to change your tax withholding with OPM online. I also took more out of TSP filing single, zero exemptions. Social Security also has option to withhold taxes https://www.irs.gov/pub/irs-pdf/fw4v.pdf With conversion last year, I was worried about a penalty so I calculated taxes late December at end of year and made some adjustments but was ready to submit estimated tax payment in first part of January as last resort. Making estimated tax payments can be done online pretty easily https://www.irs.gov/payments/direct-pay and you have until early-mid-January of the following year to make a payment if needed.

User avatar
MakeMe$$$$
Posts: 772
Joined: Tue Aug 23, 2011 10:12 pm

Re: Tax Implications, Broker vs. IRA Account

Post by MakeMe$$$$ »

Anne, you are correct that changing withholdings is pretty simple. I am working things as you suggest but I hadn't considered that a single estimated tax payment in early January could be an easy way to make that last minute adjustment. I am also intrigued with the direct pay. I have a system in my broker account where 1/2 my gains go into savings and that would cover capital gains so I could easily use that to cover additional taxes. If I'm reading the site correctly I can direct pay as often as I like but I'll study up on that closer.

My first goal was to get more control for investing and get out of TSP to do that. I just wanted to be done with TSP ASAP. I had thought about the Roth but I didn't want to get smacked with the tax in the process.

My other thought was that if I could beat the S&P 500 during the current bull market I could make more money with the additional cash in the IRA. I admit that I hadn't really put enough hard work into doing the math but I felt I could give it a good shot. This was before the new tax tables came into play. Had I seen that coming I might have been more swayed by the Roth conversion.

Now, after reading your posts I might have to consider your suggestions about a second, stage roll over from my IRA to a Roth. I will study on that too.

Thanks both of you.
Don
Rolled over to Fidelity 2/24/18.
Fantasy still playing with Daily Strategy 12767.

User avatar
evilanne
Posts: 1886
Joined: Thu May 14, 2015 6:52 pm

Re: Tax Implications, Broker vs. IRA Account

Post by evilanne »

Remember that the new Tax Rates end in 2025 or 2026 and once you hit RMDs, you have very little control over your withdrawal rate/income/taxes other than you can always withdraw more and pay more taxes. The tax hit always hurts but if you can get some good growth in a Roth you have more flexibility in managing your taxes later.

The tax advantage passes on to your beneficiary(s)--spouse can treat it as their own and non-spouse beneficiary is only taxed on any earnings after date of death.

Filing MFJ, you probably have enough head room to convert as much as you can stomach in additional taxes. Another advantage of IRAs is that your broker can transfer securities from your IRA to a Roth IRA--in other words, you don't have to sell assets to do the conversion, you will get 1099-R for the value of the securities on the date transferred. Best time to do it is when the market makes a correction.

2018 Income Tax Brackets
Rate Individuals . . . . . . . . .Married Filing Jointly
12% $9,526 to $38,700 . . . $19,051 to $77,400
22% 38,701 to $82,500 . . . $77,401 to $165,000

User avatar
MakeMe$$$$
Posts: 772
Joined: Tue Aug 23, 2011 10:12 pm

Re: Tax Implications, Broker vs. IRA Account

Post by MakeMe$$$$ »

evilanne wrote:Remember that the new Tax Rates end in 2025 or 2026 and once you hit RMDs, ...
However, if I have this all figured out...If I do roll things over to the Roth than I won't have to worry about tax rates when taking any withdrawals from the Roth. Correct? Of course, I will have to deal with the tax rolling form a traditional IRA to the Roth.
Don
Rolled over to Fidelity 2/24/18.
Fantasy still playing with Daily Strategy 12767.

User avatar
evilanne
Posts: 1886
Joined: Thu May 14, 2015 6:52 pm

Re: Tax Implications, Broker vs. IRA Account

Post by evilanne »

MakeMe$$$$ wrote:If I do roll things over to the Roth than I won't have to worry about tax rates when taking any withdrawals from the Roth. Correct?
Correct, except there is the 59.5 rule and a 5 year rule that applies to withdrawal of earnings. You should be able to withdraw contributions at any time after paying taxes. See https://www.bankrate.com/investing/ira/ ... ent-times/ I don't have to worry about this as I started my TSP 5 years ago and don't plan on withdrawing anything in the near future. But once you a convert, you shouldn't have to worry about tax rates as long as it is qualified. I believe if you are over 59.5 the 5 year rule may not even be relevant.

Check with Fidelity on how they can facilitate. I call my broker, tell them what I want to do. They email me the form, I sign, scan, email back and the transaction takes place in a day or two. With discount brokerage, you may have to do more but there isn't much to it--the timeline may differ but it shouldn't be that complicated. They issue the 1099-R as required

Note: For regular Roth account you can contribute for 2017 any time prior to tax filing deadline (must have had W-2 or Sch C earnings; may be helpful to have account set up prior to any conversion). For conversions, the deadline is 31 December.

mindofmush
Posts: 353
Joined: Mon Jul 02, 2012 1:38 pm

Re: Tax Implications, Broker vs. IRA Account

Post by mindofmush »

The cost (in taxes) to move your current IRA into a Standard Brokerage account or into a Roth IRA account is the same. Pulling money out of either account is also the same (after the 5 year rule).

Your investment style should determine which type of account is better tax wise.

If you are a LONG TERM investor that makes your gains as LT capital gains and Qualified dividends, the the Standard Brokerage account is better, especially if you can maneuver yourself into the 12% tax bracket. (taxes on capital gains & qualified dividends are zero for the 12% tax bracket)

If you want to trade more often than once a year (or sell covered calls or sell put spreads, etc), then the Roth IRA is a better choice since you won't have to pay taxes on any of those short term gains, ever. (Disadvantage is no margin available to IRA's.) (Added advantage is tax free inheritance to beneficiaries.)

One last thing, you can transfer your money from your existing IRA to a Roth IRA as a conversion but you cannot move money from your standard brokerage account to any IRA (except as a contribution of earned income which will be zero since you said you ain't going back to work)
mo meng, mo ching (which loosely means: no money, no life)

Post Reply

Fund Prices2021-04-16

FundPriceDayYTD
G $16.56 0.00% 0.34%
F $20.66 -0.21% -2.53%
C $62.57 0.36% 11.92%
S $83.28 -0.04% 12.24%
I $38.19 0.63% 7.92%
L2065 $13.71 0.39% 10.49%
L2060 $13.71 0.39% 10.49%
L2055 $13.71 0.39% 10.49%
L2050 $27.99 0.31% 8.45%
L2045 $12.79 0.29% 7.92%
L2040 $46.72 0.27% 7.42%
L2035 $12.36 0.25% 6.82%
L2030 $41.20 0.23% 6.25%
L2025 $11.71 0.18% 4.93%
Linc $22.82 0.08% 2.45%

Pending Allocations

Under development. For now, you may view Pending Allocations by going to "fantasy TSP" and selecting "Leaderboard sort" of "Pending Allocations".

What else

"Don't ever half-ass two things. Whole-ass one thing."
- Ron Swanson