After tax brokerage account?

[des999]

Hi all,
Most of my income is currently in tax deferred accounts, my plan in my first few years of pre-retirement is to do Roth Conversions.  B/c of this, I need a good deal of money in after tax accounts to live off of to minimize my taxes whilst doing the conversions.

I currently max out 1 Roth, and will start maxing out one for my wife.  She will be going back to work in the Fall.  At that time I'll need to start putting more money in after-tax accounts.

My thoughts are to use a brokerage account, but my knowledge is very limited.  I would use Fidelity, since that is where all my other accounts are.  Could someone make some suggestions, or provide some links/info where I can do research on them.  I need something that I can withdraw long term capital gains, since I'll be in the 15% bracket, they won't count as income during my conversions.

Any help is appreciated!

[seattlecyclone]

Fidelity is fine. Use low-cost index funds. Fidelity's Spartan series of funds qualifies.

Note that long-term capital gains do count as income regardless of your tax bracket, it's just that the tax rate is 0% at certain income levels. However because they count as income they can have an effect on other aspects of your taxes (such as Obamacare premium subsidy credits).

[nereo]

Personally I use Vanguard, but I've heard nothing but good things from members here who use Fidelity.
Since you already have money invested with Fidelity I would use them as your brokerage for tax-advantaged accounts.

[ZiziPB]

Not sure what information you are looking for, but a brokerage account at Fidelity is a good idea.  Unlike at Vanguard, where they require separate accounts for mutual funds and other stuff, a brokerage account at Fidelity will hold mutual funds, ETFs and individual stocks.  There are a number of good, low-cost index funds that Fidelity offers with no commissions.  You can't go wrong with them.

Some additional helpful info: https://www.bogleheads.org/wiki/Fidelity

[des999]

Thanks for that info and link ZiziPB.

[des999]

Fidelity is fine. Use low-cost index funds. Fidelity's Spartan series of funds qualifies.

Note that long-term capital gains do count as income regardless of your tax bracket, it's just that the tax rate is 0% at certain income levels. However because they count as income they can have an effect on other aspects of your taxes (such as Obamacare premium subsidy credits).

Thanks for the info.

I did not realize that long-term capital gains counted as income for ACA subsidies, that is good to know.

But, the long term capital gains do not count as income as far as taxes are  concerned when doing the conversion? 

[des999]

Personally I use Vanguard, but I've heard nothing but good things from members here who use Fidelity.
Since you already have money invested with Fidelity I would use them as your brokerage for tax-advantaged accounts.

I think that will be my plan, thanks Nereo

[MDM]

But, the long term capital gains do not count as income as far as taxes are  concerned when doing the conversion?

Sorry, they do count.  They are taxed at different rates than ordinary income, but they absolutely count as income.

You might use your 2015 tax software to verify this for yourself: create a dummy return file and look at the tax effects of different amounts of ordinary and LTCG/QD income.

If you are referring specifically to the taxation of tIRA->Roth conversions, every single dollar* of tIRA distribution counts as ordinary income, regardless of whether you contributed the dollar or it was added to the tIRA via interest, qualified dividends, capital gains, etc.

*except for non-deductible contributions, but we'll assume those are zero.

[Spork]

Not sure what information you are looking for, but a brokerage account at Fidelity is a good idea.  Unlike at Vanguard, where they require separate accounts for mutual funds and other stuff, a brokerage account at Fidelity will hold mutual funds, ETFs and individual stocks.  There are a number of good, low-cost index funds that Fidelity offers with no commissions.  You can't go wrong with them.

Some additional helpful info: https://www.bogleheads.org/wiki/Fidelity

Sorry for the side question but.... really?

I've had a Vanguard account forever.... and had a brokerage account elsewhere forever where I (minimally) traded a few stocks.  I had considered over time moving them to Vanguard since the trades were free.  (I don't trade much, I know it varies by account balance and number of trades.)  I didn't realize it required a different account.

[seattlecyclone]

Not sure what information you are looking for, but a brokerage account at Fidelity is a good idea.  Unlike at Vanguard, where they require separate accounts for mutual funds and other stuff, a brokerage account at Fidelity will hold mutual funds, ETFs and individual stocks.  There are a number of good, low-cost index funds that Fidelity offers with no commissions.  You can't go wrong with them.

Some additional helpful info: https://www.bogleheads.org/wiki/Fidelity

Sorry for the side question but.... really?

I've had a Vanguard account forever.... and had a brokerage account elsewhere forever where I (minimally) traded a few stocks.  I had considered over time moving them to Vanguard since the trades were free.  (I don't trade much, I know it varies by account balance and number of trades.)  I didn't realize it required a different account.

This is actually out-of-date information. Vanguard used to have separate accounts for brokerage vs. mutual funds. The insanity would be compounded by the fact that each account type (Roth IRA, traditional IRA, taxable, etc.) would need to have two separate accounts if you wanted to have some mutual funds and some stock/ETF trading.

However they now have a new platform where both things appear in the same account. This is, as far as I know, used for all new accounts. They're actively steering people on the old platform to "merge" their separate accounts as well.

[LiseE]

We're in a similar situation and will start funding a taxable vanguard account which we will live off of while building our ladder.  My question is regarding the Vanguard account and taxes since this is new to us ... we currently only receive an interest statement from our bank for showing we earned like $4 (whoo hoo).  But lets say we have 20K in our taxable account by the end of this year and we've been reinvesting the dividends (so haven't taken anything out) .. what kind of tax treatment will this account get in 2017?  If it earns XXX in interest and/or dividends, are those taxable (even though I haven't taken them out of the account)?

[MDM]

But lets say we have 20K in our taxable account by the end of this year and we've been reinvesting the dividends (so haven't taken anything out) .. what kind of tax treatment will this account get in 2017?  If it earns XXX in interest and/or dividends, are those taxable (even though I haven't taken them out of the account)?

Yes they are taxable - whether you use the money to buy groceries or more investments, the interest and dividends from taxable investments are taxable.

But interest is taxed differently than "qualified" dividends (see http://www.nasdaq.com/article/qualified-vs-unqualified-dividends-cm184991).

[MustacheAndaHalf]

"But lets say we have 20K in our taxable account by the end of this year and we've been reinvesting the dividends ..."

Assuming it's $20,000 of Vanguard Total Stock Market (VTSAX) for a moment, with a 2.0% SEC yield.  So you'd expect 2% dividends, or $400.  The median income bracket is 25% with a favorable treatment of 15% tax on qualified dividends.  So with $20,000 in VTSAX you might pay $60 tax on the qualified stock dividends.