Advice on moving individual investing account to Traditional IRA

[CDP45]

Hello,

Wife came with a taxable account, would like to move that over to tIRA. They money is in mutual funds that are automatically reinvesting the dividends, and we've been paying a small amount of taxes on this every year in the form of a 1099-DIV that says total capital gains distribution for 2014 even though I haven't touched it at all in 2014..

I assume I'll be adding the difference between the cost-basis and selling price (capital gain) to my gross income in 2015 and then:

1. Can I just sell $5,500 worth of these funds and move it to Wife 2015 tIRA contribution?
1b. Would it make any (tax) difference if I sent it to my checking account and then made the contribution?

2. Can I sell an additional $5,500 worth of these funds to put towards my 2015 contribution (by selling and depositing proceeds into checking account and then sending to my tIRA?)

Does this make sense? Please let me know if I can take a better course of action-  Thanks everyone! 

[MDM]

I assume I'll be adding the difference between the cost-basis and selling price (capital gain) to my gross income in 2015

Yes.

and then:
1. Can I just sell $5,500 worth of these funds and move it to Wife 2015 tIRA contribution?
1b. Would it make any (tax) difference if I sent it to my checking account and then made the contribution?

1. Yes
1b. No

2. Can I sell an additional $5,500 worth of these funds to put towards my 2015 contribution (by selling and depositing proceeds into checking account and then sending to my tIRA?)

Yes.

Answers above assume that you have the correct amount (at least $11K and no more than the applicable limit you can find at http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits) of earned income - do you?  Dividends and capital gains are not "earned income."  Also, a non-working spouse may fit under a higher income limit, but the combined earned income has to be at least $11K for you to make a deductible $11K contribution.

Instead of incurring the capital gains, could you fund the IRAs out of 2015 earned income?

[CDP45]

Thanks for writing back!

Yes wife is also working part time so no problem there with income. We could fund with earned income, but it's probably best to work towards maximizing her 401k instead (even though she gets minimal match and high fees and we're in the 15% bracket with all our deductions right?)

I'm just sort of uncomfortable with this account given the tax accounting complexities, every quarter adds a new basis and at the end of the year the amount of taxable gains seems totally random.

[terran]

I'm pretty sure you need earned income to put into any tax advantaged account. So if your wife makes $20,000 taxable income you could put $11,000 in your IRA's ($5500 each) and $9000 in your wife's 401k and live off the taxable account, but you can't put any more than that in the tax advantaged accounts.

In this example you would want to favor Roth accounts to the extent possible because there's no advantage to putting money in a Traditional IRA instead of a roth once you're not paying any taxes anyway.

The earned income can also come from either you or your wife, it doesn't matter who as far as IRA's are concerned.

I would probably fill the IRA first before a 401k with no match and high fees.

[Joel]

i think it's a good idea to max the IRAs. Next, I would max both 401ks and use the investment money to live off of it needed. There is absolutely no reason to have money in a taxable account if you are not maximizing your tax advantages accounts.

[teen persuasion]

Wait - if you are in the 15% bracket, shouldn't your capital gains be taxed at 0%?

[Wile E. Coyote]

Hello,

Wife came with a taxable account, would like to move that over to tIRA. They money is in mutual funds that are automatically reinvesting the dividends, and we've been paying a small amount of taxes on this every year in the form of a 1099-DIV that says total capital gains distribution for 2014 even though I haven't touched it at all in 2014..

I assume I'll be adding the difference between the cost-basis and selling price (capital gain) to my gross income in 2015 and then:

1. Can I just sell $5,500 worth of these funds and move it to Wife 2015 tIRA contribution?
1b. Would it make any (tax) difference if I sent it to my checking account and then made the contribution?

2. Can I sell an additional $5,500 worth of these funds to put towards my 2015 contribution (by selling and depositing proceeds into checking account and then sending to my tIRA?)

Does this make sense? Please let me know if I can take a better course of action-  Thanks everyone!

Capital gain distributions on a mutual fund are just that, capital gain.  There was no sale so there is no selling price and no cost basis to offset.  You will treat the full amount as capital gain and it will be taxed accordingly.

Here is some langauge from the IRS along with a link for more info:

"Capital gain distributions from mutual funds are reported to you on Form 1099-DIV, Dividends and Distributions.  Capital gain distributions are taxed as long-term capital gains regardless of how long you have owned the shares in the mutual funds.  If capital gain distributions are automatically reinvested, the reinvested amount is the basis of the additional shares purchased."

http://www.irs.gov/uac/Reporting-Capital-Gains

[MDM]

Wait - if you are in the 15% bracket, shouldn't your capital gains be taxed at 0%?

Excellent point.  Makes it more palatable, perhaps even desirable, to take the capital gains now - especially if there is an expectation of income increasing in future years.

Capital gain distributions on a mutual fund are just that, capital gain.  There was no sale so there is no selling price and no cost basis to offset.  You will treat the full amount as capital gain and it will be taxed accordingly.

Correct for income reported on 1099-DIV in past years.

If OP is proposing to sell shares of mutual funds, that will be reported on 1099-B and there will be cost bases, selling prices, etc.

[CDP45]

Wait - if you are in the 15% bracket, shouldn't your capital gains be taxed at 0%?

Excellent point.  Makes it more palatable, perhaps even desirable, to take the capital gains now - especially if there is an expectation of income increasing in future years.

Capital gain distributions on a mutual fund are just that, capital gain.  There was no sale so there is no selling price and no cost basis to offset.  You will treat the full amount as capital gain and it will be taxed accordingly.

Correct for income reported on 1099-DIV in past years.

If OP is proposing to sell shares of mutual funds, that will be reported on 1099-B and there will be cost bases, selling prices, etc.

I believe making the $11,000 tIRA contribution will get us to 15%for 2015, and it would be nice to suffer less taxes as a result of the sale of some shares...
Additionally, the importance of tax-optimizing strategies seems to easily trump many other investing considerations at income levels that qualify for full tIRA deduction.

Thank you everyone who responded, I'm feeling more comfortable with this plan.

[teen persuasion]

Thanks for writing back!

Yes wife is also working part time so no problem there with income. We could fund with earned income, but it's probably best to work towards maximizing her 401k instead (even though she gets minimal match and high fees and we're in the 15% bracket with all our deductions right?)

I'm just sort of uncomfortable with this account given the tax accounting complexities, every quarter adds a new basis and at the end of the year the amount of taxable gains seems totally random.

If I understand this correctly, the taxable gains you have been seeing are from trades made by the fund managers of your mutual fund.  They are totally random, because they decide when/if to trade.  Actively managed funds can have more trading, while index funds generally have little trading - by definition they are copying the makeup of an index.  So, what is in your taxable account?  Perhaps you should assess which funds you have where.

You need to take a bigger picture view of your entire stash: taxable, pre-tax, post-tax.  Having a mix of different accounts with different tax treatments gives you flexibility.  Personally, I wish we had more in a taxable account, but we've been trying to max out all our tax advantaged accounts on a low income and there's nothing left for taxable.  Throw in college financial aid rules, and it is tricky.  You need to project out a bit to see how YOUR circumstances might play out - stash building, Roth pipeline, ??

[frugalnacho]

I assume I'll be adding the difference between the cost-basis and selling price (capital gain) to my gross income in 2015

Yes.

and then:
1. Can I just sell $5,500 worth of these funds and move it to Wife 2015 tIRA contribution?
1b. Would it make any (tax) difference if I sent it to my checking account and then made the contribution?

1. Yes
1b. No

2. Can I sell an additional $5,500 worth of these funds to put towards my 2015 contribution (by selling and depositing proceeds into checking account and then sending to my tIRA?)

Yes.

Answers above assume that you have the correct amount (at least $11K and no more than the applicable limit you can find at http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits) of earned income - do you?  Dividends and capital gains are not "earned income."  Also, a non-working spouse may fit under a higher income limit, but the combined earned income has to be at least $11K for you to make a deductible $11K contribution.

Instead of incurring the capital gains, could you fund the IRAs out of 2015 earned income?

Won't all those capital gains not be taxed as long as the op is in the 10% or 15% brackets after the capital gains is added?  If that's the case, then why not lock those gains in tax free?