Learning, Sharing, and Teaching > Taxes
Tax consequences of withdrawing index funds
BiggerFishToFI:
I have ~13k in a taxable brokerage account, 100% in VTSAX. It has all been invested in the past 6 months. The amount invested has been ~12k and the amount of growth is ~1k.
I am on the verge of quitting my job to start a consulting business and am considering withdrawing this to pad my emergency fund / help cover startup costs.
As i understand it I will owe taxes at my marginal rate on the 1k of growth. If I am to leave it in place (for the long term), I will owe taxes on the future growth at the long term capital gains rate of 15%, and that tax is only paid when I sell some of the fund? Is that correct?
If for example two years from now I have 20k of contributions and a 25k balance and I withdraw 5k, I would pay 15% tax on that 5k and anything else I withdrew would not be taxed? What about growth that had occurred withing the past year prior to withdrawal (i pay at my marginal rate???)
Thanks for any help or references on this!
DarkandStormy:
If it's a short-term gain (have held for 12 months or less) yes, you pay as if it's ordinary income at your marginal rate.
If it's long term, you pay 0% cap gains if you're int he 10% or 15% marginal tax brackets. Above that, it's taxed at 15%.
In your second scenario of having $5k of gains and withdrawing $5k, no it's not a straight tax on $5k. It's a bit more complicated, but you'd be withdrawing $5k of shares. So some of that $5k would be principal (because of investing at various times, it's not this easy, but let's keep it simple for this example). Let's say 80% of your $25k total is principal ($20k in contributions). That means 20% of every dollar of the $25k is cap gains. So you'd pay tax on 20% of $5k or $1k. Of that $1k of capital gains, you'd likely pay 15% (unless you bring your taxable income down to the 15% or 10% marginal brackets), or $150. Not always as cut and draw, but you'd pay $150 in capital gains tax on the $5k withdrawl in a couple years (for simplicity, I ignored dividends, although VTSAX does pay out a small dividend).
BiggerFishToFI:
Thanks DarkandStormy, your response definitely helps. If i were to withdraw the entire 13k tomorrow I would owe taxes at my marginal rate on the entire amount of gains, if I were to withdraw half the entire balance tomorrow I would owe taxes on half of the gains.
To clarify on your first point, hypothetically if my wife and I were to retire tomorrow and we had 5M in a vanguard taxable index fund. We did not have any other income this year.
Filing taxes jointly, we could withdraw $50,400 a year (15% tax bracket) and not pay ANY taxes on the capital gains??!
If we each filed separately we could withdraw $37,650 each without paying taxes?
RWD:
--- Quote from: soontoberich on October 16, 2017, 11:41:06 AM ---Filing taxes jointly, we could withdraw $50,400 a year (15% tax bracket) and not pay ANY taxes on the capital gains??!
--- End quote ---
http://www.gocurrycracker.com/never-pay-taxes-again/
--- Quote ---Unless that income comes from qualified dividends or long term capital gains. In this case, a married couple can have $19,500 a year in income AND $70,700 in investment income, TAX FREE
--- End quote ---
BiggerFishToFI:
--- Quote from: RWD on October 16, 2017, 12:00:23 PM ---
--- Quote from: soontoberich on October 16, 2017, 11:41:06 AM ---Filing taxes jointly, we could withdraw $50,400 a year (15% tax bracket) and not pay ANY taxes on the capital gains??!
--- End quote ---
http://www.gocurrycracker.com/never-pay-taxes-again/
--- Quote ---Unless that income comes from qualified dividends or long term capital gains. In this case, a married couple can have $19,500 a year in income AND $70,700 in investment income, TAX FREE
--- End quote ---
--- End quote ---
WOW! If only we had a stache capable of producing that... soon.
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