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Tax Implications, Broker vs. IRA Account
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Author:  MakeMe$$$$ [ Sat Mar 10, 2018 2:44 pm ]
Post subject:  Tax Implications, Broker vs. IRA Account

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.)

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