Author Topic: Withdrawal from Vanguard index funds  (Read 1014 times)

kballgetlost

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Withdrawal from Vanguard index funds
« on: February 06, 2020, 10:54:52 AM »
Hoping for a little clarification. I opened a Vanguard account a few years back and I put after tax money into index funds when I can. My understanding was I could withdrawal any money that I put in without it being taxed. If I wanted to withdrawal any earnings/dividends then that would be subject to tax. My husband and I have a few bigger chunks of change coming our way and we wanted to put this money into the Vanguard account to get better returns than a savings account as we have a large purchase we are budgeting to make in 2 years. My question is how do you withdrawal from the Vanguard account without taking divendends. When I looked into selling funds to transfer to my bank account it asked about using average cost basis vs other cost basis options and mentioned reporting it to the IRS. So wouldn't that make it seem like income? Even though this is all money we have already been taxed on?

Sandi_k

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Re: Withdrawal from Vanguard index funds
« Reply #1 on: February 06, 2020, 11:03:57 AM »
Hmmm. You don't include info that we'd need to help.

1 - Is this Vanguard account a ROTH IRA account? If so, yes, it's already been taxed, and you are allowed to withdraw CONTRIBUTION AMOUNTS ONLY without penalty.

2 - Are you over 59.5- and have you had this account at least 5 years? If so, you can then withdraw the EARNINGS without tax or penalty, as well.

3 - If this is simply a BROKERAGE, NON-RETIREMENT account, anything you sell and withdraw will be taxed. You don't get to withdraw only your contributions - you have to identify via date of purchase which shares you are selling, OR you have to sell by declaring that you will AVERAGE the purchase cost of all of your shares, and then dividends are calculated based on that average. Either way, those shares have dividends that you have to pay taxes on.

4 - If you will need money within 5 years, it should NOT be invested. You can put it in an online savings account, or in a CD for higher interest. But investing it means that you could lose the value of the initial funds.

nereo

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Re: Withdrawal from Vanguard index funds
« Reply #2 on: February 06, 2020, 11:11:39 AM »
You are correct that the method used for calculating the cost basis determines your taxable burden, and how gains are calculated depends on how long you have held those investments.

In general investments held for longer than 1 year are taxed at the much more favorable LTCG rates.  If hold investments earlier than one year gains will be taxed at your marginal tax rate.  Contributions are not taxed, but of course this gets back to how you calculate your cost basis.

Average Cost Basis is the default because it is the easiest to calculate and takes the least amount of work.  If you keep detailed records of each contribution and its cost basis (i.e. what you purchased it for, minus any dividends or splits) you can just sell certain shares and their related gains, allowing you to only sell shares that are > 1 year old.





kballgetlost

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Re: Withdrawal from Vanguard index funds
« Reply #3 on: February 06, 2020, 11:34:50 AM »
Sandi - it is not a Roth account nor a brokerage account. I just created an account with Vanguard and bought VFIAX (was VFINX but it was converted to the admiral shares in May). I do have a separate small brokerage account with them but I would touch that. I am 33 so definitely not near 59.5. So even though I'm putting in money that I've earned and have already been taxed on, there is no way to withdrawal just my own contribution?

I was definitely looking at other options like high yield savings or CDs as well. Just thought with the market being decent we could make a little more on the vanguard but of course the market could turn at any time. I'll see if I can find some higher yield CD options. Thanks again.

Nereo - thank you for the clarification on cost basis and the advice about shares held longer than a year being taxed more favorably. I do believe I have those records!

MustacheAndaHalf

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Re: Withdrawal from Vanguard index funds
« Reply #4 on: February 06, 2020, 11:44:34 AM »
Money outside retirement accounts probably has gains.  You profit on the gains, so the IRS taxes that when you sell.

To illustrate, let's say you bought $10,000 of VFIAX 3 years ago.  Vanguard says it's grown 14.5% per year for the past 3 years.  So it might have grown +50% in those years to $15,000.  If you sold all $15,000 you would have the original $10,000 plus $5,000 of gains.  You owe tax on the gains, or $5,000.  The average tax payer pays 15% in that case (assets held more than 365 days), or $750.  And you don't have to sell it all - you can sell some, instead.

Have you been receiving 1099-DIV from Vanguard every year?  When VFIAX issues a dividend, you pay tax on the dividend.  It's usually pretty small, like a 2% dividend.  On $15,000 that would be $300 dividend, probably also taxed at 15%, or $45 in tax.

terran

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Re: Withdrawal from Vanguard index funds
« Reply #5 on: February 06, 2020, 11:57:16 AM »
Your understanding was kind of right in that you don't pay taxes on what you put in (the basis), but as others are pointing out you do pay tax on the gains and there's no way to separate that out. You realize gains (on which you'll pay tax) in proportion to the amount you've sold. You might consider switching from average cost basis tracking to specific identification tracking. This will let you pick the specific shares you want to sell so you can pick the shares with the lowest gains instead of realizing gains averaged across the investment sold.

The bigger question is whether you should be investing this money at all? The usual advice is not to invest money you need within 5 years. The only way I would consider investing money you need within 2 years is if you actually expect to want (not need) that money, and if the markets have dropped in that time you're willing to reconsider and hold off on the purchase.

kballgetlost

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Re: Withdrawal from Vanguard index funds
« Reply #6 on: February 06, 2020, 12:12:23 PM »
Thank you all for your helpful information. I thought that it was possible to separate out my contributions from the gains but I see that isn't possible. I appreciate the information on tracking specific identification over average cost.

While yes we won't need the money in two years we would just want to use it, so I will look at alternatives. Thanks again!

DeniseNJ

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Re: Withdrawal from Vanguard index funds
« Reply #7 on: February 07, 2020, 03:28:02 PM »
But don't you have to have capital gains of like 78K to be taxed on them?

ETA:  Please don't tell me it's total income that can't be over 78K.

seattlecyclone

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Re: Withdrawal from Vanguard index funds
« Reply #8 on: February 07, 2020, 10:04:20 PM »
But don't you have to have capital gains of like 78K to be taxed on them?

ETA:  Please don't tell me it's total income that can't be over 78K.

Ignorance is bliss, ain't it?

Once your total taxable income (i.e. after the standard/itemized deductions) is more than $40k (if single) or $80k (if married filing jointly), you'll pay 15% on any excess gain over this amount, at least until you hit the 20% capital gains bracket at nearly half a million dollars.

nereo

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Re: Withdrawal from Vanguard index funds
« Reply #9 on: February 08, 2020, 05:54:29 AM »
But don't you have to have capital gains of like 78K to be taxed on them?

ETA:  Please don't tell me it's total income that can't be over 78K.

Ignorance is bliss, ain't it?

Once your total taxable income (i.e. after the standard/itemized deductions) is more than $40k (if single) or $80k (if married filing jointly), you'll pay 15% on any excess gain over this amount, at least until you hit the 20% capital gains bracket at nearly half a million dollars.

Every now and then I love being below average (earning-wise)  :-)

FWIW - this is why many Early Retirees can count on extremely low taxable burdens; they have little or no earned income, and their LTCG distribuutions are low enough to keep them in the 0% bracket.