I’m sure there is an easy answer to this, but I don’t even know how to Google it.
I have an inherited IRA that requires mandatory minimum withdrawals. When withdrawing, I will have taxes withheld, both state and federal.
I don’t need access to the funds, so I’ll likely plop it into a conservative mutual fund.
Here is where my confusion enters. Suppose in 10 years I withdraw from that fund. Will that be considered income that I will have to claim? And if so, wouldn’t I be double-taxed on that same money?
Or, maybe I have that wrong. Maybe my question is: If you withdraw from a regular ol’ mutual fund, are you taxed on that? Do you even have to mention it on your 1040?
When you reinvest in a mutual fund, you are going to do it in a non-qualified brokerage account. At withdrawal, you will pay taxes on any capital gains that accrue. Capital gains are gains above the cost basis - so you’re only being taxed on money that hasn’t been taxed yet.
When did you inherit the inherited IRA? I have one as well, and it’s pre-Secure Act, which means I have to take RMDs every year (which I just transfer into a brokerage account). Newer inherited IRAs have to be completely withdrawn within 10 years now.
Thanks, @Munch. I have two years left of mandatory withdrawals, I’m just going to empty it out toward the end of this year and be done with it.
In the past I’ve just dumped the withdrawals into a money market account (Fidelity’s SPAXX), but I don’t need that level of liquidity and I know I can do better putting it elsewhere.
Said another way, when you withdraw IRA money and pay the relevant tax, the remaining money you invest elsewhere has had all the “IRA-ness” washed off of it. It becomes ordinary money. Just like the money in your paycheck.
You can buy a mutual fund, some shares of stock, an ETF, a treasury bond, or stick it in a savings account. Any dividend or interest the investment throws is ordinary taxable income in they year it’s paid to you. When you eventually sell the asset you’ll pay capital gains taxes on any gains, or have a loss you can use to offset gains on other asset sales.
Maybe USA rules are different - in Canada, if I put money into a fund that is not registered tax-free (RRSP or TFSA, which I gather is equiv of 401K or IRA) then each year I get a form from the fund (T4a or such, I think) and I much include the growth in the fund that year as income - either captial gains, or if it is interest, as regular income. Thus when I cash out of the fund, I only owe taxes on YTD accumulations.
So is a mutual fund in the USA taxed differently? I gather from the conversation above, the tax liability is acccumulated and payable on withdrawal? It must be pretty complex accounting for funds where peoplee are putting amounts in at different intervals. But I assume it still boils down to “only the growth is taxable”?
If you put the funds into a mutual fund, you will also owe taxes on your share of any dividends they collect in your name or any capital gains they realize on their trading. You should get a 1099 in Jan through Feb (though often delayed until March) each year saying what you owe. That’s just combined with the rest of your income in your 1040 to the IRS.
Yeah, it can be complex. “Basis” is what you paid for the fund. Capital gain (or loss) is the difference between the basis and what you sell it for. The exact amount of capital gain tax depends on income and how long you held the asset (less than a year or more than a year), but is generally 15 or 20%.
So that can create lots of things to consider. If you’ve been investing $250/month into a fund for the last 10 years, it has increased in price, and now you sell $10,000 of the fund, which $250 investment did you sell?
Fortunately the brokerage has to keep track of all this stuff. When I look at my portfolio I see the average cost I paid for a share of the various funds I own. When I get my end of year tax document it tells me what my capital gain/loss was for any sales I made.
Until I sell there is no tax on the appreciation of the fund. During ownership there may be tax on interest or dividends which the fund produced. The brokerage will let me know about this on a 1099INT or 1099DIV tax statement.
The answer to that question is based on a setting of your account. It is either First In, First Out (FIFO) or Last In First Out (LIFO). But as you say the brokerage keeps track of it and notifies you of the capital gain or loss.
IRA is an individual’s account, 401k is an employer-sponsored one (there are other types for different types of employers: 403b, 401a, 457, SIMPLE, SEP). Contribution limits and some rules differ, but they mostly work the same for tax. The distinction here is that RRSP is analogous to a Traditional IRA or 401k - you deduct contributions and pay taxes when you take them out. TFSA is analogous to a Roth IRA or 401k, you don’t deduct contributions, but generally don’t pay taxes on withdrawals, whether they reflect your original contribution or growth.
OP doesn’t say what kind of account it is, but judging by the wording it sounds like a Traditional.
Mutual funds are one type of investment that spreads across multiple stocks, bonds, etc. and they can be invested at a brokerage without any tax advantage, or invested through retirement in which case they have advantages but also (generally) disadvantages if taken out before retirement age. If the money is taken out or transferred to another account, there would be regular tax. Then if put in a regular brokerage, it would only be taxed (sale proceeds - basis) on withdrawal, or annually if it generates dividends, for a smaller rate (just the income it generated, and then usually a smaller tax rate than your top bracket).
For your average person, FIFO is the norm and assumed unless you intentionally choose otherwise. It’s not hard to account for with any modern brokerage, if it’s really old records may be harder to track down.