Author Topic: What if I want to withdraw index fund income before 59?  (Read 1394 times)

deek

  • Bristles
  • ***
  • Posts: 449
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

  • Handlebar Stache
  • *****
  • Posts: 1141
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

  • Pencil Stache
  • ****
  • Posts: 668
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: 3796
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.

BlueHouse

  • Magnum Stache
  • ******
  • Posts: 4136
  • Location: WDC
Re: What if I want to withdraw index fund income before 59?
« Reply #4 on: October 05, 2021, 06:59:49 AM »
Here's another way to look at it:

The government is always going to want to tax your money.  Think about it in terms of whether they have already taxed what you've invested or not. 

With an IRA or 401k or most other "tax-advantaged" accounts, you are depositing money (usually through a paycheck deduction) that has NOT been taxed yet.  And it can grow (increase in value over the years, + earn and reinvest dividends) without paying taxes on the growth & earnings.  So the value of compounding is that much bigger.   But when you withdraw that money when you're older, the  IRS wants its money.  and NONE of that money has ever been taxed as income, so you pay tax on ALL of it, just as if it were income.

With a regular brokerage account (your TD Ameritrade), the money you've invested has already been taxed.  You used money that you've been paid after taxes.  So the IRS doesn't need to double-tax that money.  However, the earnings and growth have never been taxed.  So they want a piece of that.  Someone somewhere decided that this isn't regular income, so they tax those earnings/growth/gains at a different rate.   That's the capital gains tax. 

Looking at this way, helped me remember what was what. 

ericrugiero

  • Pencil Stache
  • ****
  • Posts: 740
Re: What if I want to withdraw index fund income before 59?
« Reply #5 on: October 05, 2021, 08:02:56 AM »
Here's another way to look at it:

The government is always going to want to tax your money.  Think about it in terms of whether they have already taxed what you've invested or not. 

With an IRA or 401k or most other "tax-advantaged" accounts, you are depositing money (usually through a paycheck deduction) that has NOT been taxed yet.  And it can grow (increase in value over the years, + earn and reinvest dividends) without paying taxes on the growth & earnings.  So the value of compounding is that much bigger.   But when you withdraw that money when you're older, the  IRS wants its money.  and NONE of that money has ever been taxed as income, so you pay tax on ALL of it, just as if it were income.

With a regular brokerage account (your TD Ameritrade), the money you've invested has already been taxed.  You used money that you've been paid after taxes.  So the IRS doesn't need to double-tax that money.  However, the earnings and growth have never been taxed.  So they want a piece of that.  Someone somewhere decided that this isn't regular income, so they tax those earnings/growth/gains at a different rate.   That's the capital gains tax. 

Looking at this way, helped me remember what was what.

This is all true.  The tax advantaged accounts reduce the overall taxes paid (with rare exceptions) by excluding taxes on one end in exchange for limiting withdraws before 59 1/2
-  Normal (taxable accounts) you pay income tax when you earn the money and ALSO pay taxes on any profits you get from investing the money. You can take the money out any time but must pay taxes on gains when you withdraw it.  So, you are paying taxes in the beginning AND the end.
-  Traditional 401K, 403B, IRA, etc you pay no taxes when you earn the money.  But you pay income tax on all the money when it's withdrawn. 
-  Roth 401K, 403B, IRA, etc you pay taxes when you earn the money.  But, once it's invested in a Roth account there are no taxes on the profit it earns as long as you follow the rules for withdraw.