Author Topic: What if I want to withdraw index fund income before 59?  (Read 422 times)

deek

  • Bristles
  • ***
  • Posts: 430
What if I want to withdraw index fund income before 59?
« on: September 24, 2021, 06:31:10 AM »
I don't see this get talked about much. If I held VTSAX in TD Ameritrade just as I do in my Vanguard IRA, will it accumulate the same? Can I take out earnings that would just be taxed as regular income - avoiding the penalty I would take if I took earnings out of my IRA? I'm just wondering like, if 10-15 years down the road, I wanted to pull out regular earnings for additional income, and retire early, is it just going to mean paying regular income taxes on it?

yachi

  • Pencil Stache
  • ****
  • Posts: 734
Re: What if I want to withdraw index fund income before 59?
« Reply #1 on: September 24, 2021, 07:36:19 AM »
The IRS doesn't care what company you use, they only care about the account type.  I'm going to assume your TD Ameritrade account is a not an IRA of 401(k) account, or you would have said so.  In that case, it's a regular brokerage account, here is how TD Ameritrade explains this account:

  • NOT a tax-advantaged IRA; you are responsible to report earnings for each tax year
  • No age limits or required distributions; deposit to and withdraw from this account whenever you’d like
  • When the account owner dies, the assets pass to his or her estate

To answer your questions:

Will it accumulate the same?
Mostly yes, but dividends paid into an IRA are accumulated without a taxable event until you withdrawal from the account.  Dividends paid into a brokerage account add to your taxable income.  So you have a tax drag in the brokerage account.  The same tax drag happens if you rebalance in a brokerage account.  You're probably paying these taxes with other income, but the drag is real.
Can I take out earnings without penalty?
Yes you can, but you'll be taxed on the difference between what you sold VTSAX for and what you paid for it.  You don't get to withdrawal "contributions" first like you do in a Roth IRA.
Is it going to mean paying regular income tax on it?
No, you'll be taxed at the Capital Gains Tax Rate instead.


bmjohnson35

  • Bristles
  • ***
  • Posts: 377
Re: What if I want to withdraw index fund income before 59?
« Reply #2 on: September 24, 2021, 09:50:28 AM »
"No, you'll be taxed at the Capital Gains Tax Rate instead."

You may have some tax on the dividend income from the account, but probably very little.  As long as the capital gains are long term (over a year old), your tax burden can be minimal or none at all........if your overall taxable income is relatively low. 

terran

  • Magnum Stache
  • ******
  • Posts: 3520
Re: What if I want to withdraw index fund income before 59?
« Reply #3 on: September 24, 2021, 09:51:50 AM »
I think you're talking about a regular taxable brokerage account, not a retirement account? If so then there are no restrictions on when you withdraw any amount from such an account.

In a taxable account VTSAX will pay quarterly dividends, most/all of which will be qualified. You pay tax on dividends in the year they're received regardless of what you do with them. Qualified dividends are taxed at lower capital gains rates, while non-qualified dividends are taxed at ordinary income tax rates (the same as your other income).

When you sell VTSAX you'll also pay tax on the capital gains which are the difference between what you sell for and what you bought for. If you hold for at least one year you'll pay the lower capital gains rate and if you sell within one year of buying you'll pay tax at the ordinary income tax rate.

Rather than VTSAX you might consider investing in the ETF version, which is VTI. Most major brokerages now let you trade ETFs without commissions, while they may charge for Vanguard mutual funds.