Author Topic: Taxable Account Withdrawal Basic Question  (Read 1814 times)

Stone11

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Taxable Account Withdrawal Basic Question
« on: January 14, 2017, 02:34:55 PM »
I just opened a taxable account with Vanguard last year (VTSAX) and I had a few questions since this is my first experience with a taxable account.

1.  If I withdraw any of it within a year of its purchase, it is taxed at a higher rate than if I withdraw it after a year, correct?

2.  I can withdraw my initial contribution tax free (because it was already taxed before going in), but I have to pay tax on any gains, correct?

If 1 and 2 are right:

3.  I'm assuming the tax amount on any funds withdrawn are based on the increase value of each share, correct?  For instance, if I put $20K in all at one time and after a year it is worth $22K and I want to withdraw $5K, I am assuming that the withdrawal is only taxed on the value per share increased from the time I initially bought the shares, is this correct?   So it is essentially a pro rata taxing?

If 3 is right:

4.  How are taxes determined if there are numerous buys at different share prices?  For example, I buy $10K when shares are $50/share, another $10K when they are $55/share, and another $10K when they are $60/share.  A year passes and I want to withdraw $15K.  Is the $15K taxed as if $10K of it was bought at $50 and $5K of it was bought at $55 (ignoring gains at this point, focused on timing of contributions) or is this taxed otherwise? 

And finally:

5.  If I buy $15K of shares 13 months ago and $15K of shares 1 month ago and wish to withdraw $5K, is that taxed at the long-term rate?  And if I withdraw $20K, is $15K of the withdrawal taxed at the long-term rate with $5K of it taxed at a short term rate or would it be $10K and $10K? 

(Would this question make more sense if it was presented in number of shares purchased rather than $ amount?)


Dollar Slice

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Re: Taxable Account Withdrawal Basic Question
« Reply #1 on: January 14, 2017, 03:04:30 PM »
I'm not a tax expert and won't attempt to answer all of that - but I do want to point out that it seems you have a misunderstanding about how taxable accounts work. They are not like IRAs and 401(k)s where you are taxed at the point of withdrawal. Taking money out of your taxable account has zero tax implication - this is like moving money from checking to savings, or taking cash out of an ATM, you're just moving your own money around.

What you are taxed on is capital gains, dividends, etc. So even if you put money in and don't take money out for 20 years, you will be almost certainly be paying some taxes on it every single year - because mutual funds, stocks, bonds, etc. spin off capital gains and dividends even if you buy and hold. And any time you sell something at a profit, even if it's just rebalancing, that will also be a taxable event.

Stone11

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Re: Taxable Account Withdrawal Basic Question
« Reply #2 on: January 14, 2017, 04:54:44 PM »
My examples and questions assumed that index funds were being held in the taxable account. 

I understand that in a taxable account, dividends are taxed.  However, my questions were aimed at realizing a gain on the shares at the point of sale. 

MDM

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Re: Taxable Account Withdrawal Basic Question
« Reply #3 on: January 14, 2017, 08:13:12 PM »
(Would this question make more sense if it was presented in number of shares purchased rather than $ amount?)
Yes, to some extent.

See Cost basis methods, Specific identification of shares, and Vanguard cost basis information: Know your options.

After you read those, just ask if your questions haven't been answered.