Mr. brown and I are bickering over a taxation question.
We have temporarily stopped our monthly payments from Schwab out of our Intelligent Income portfolios because we want to instead spend down an accumulation out of our checking account. In a couple of months, we’ll resume our Schwab monthly payments.
During this hiatus, dividends from our holdings continue to occur, but now they are accumulating in the cash places of the portfolios. I maintain that these distributions are the taxable events. Mr. brown says that since we’re not taking sums out as income right now, these dividend payments are not taxable. Let’s leave aside for the moment that some of the funds are held within Roths, etc. We’re just discussing at what point a dividend or a distribution is taxable.
Your husband is correct - it isn’t a taxable event until the distribution leaves the retirement account. The cash position in the account is still within the retirement “wrapper”.
I’ll amend this. Assuming the funds are in a 401k, IRA or some other (non-Roth) qualified account, it’s not taxable until it leaves the account. If it’s in a non-qualified account (I.e. brokerage), it’s taxable once it goes to the cash position.
Correction to my addendum: if the account in question is a non-qualified brokerage account, dividends/interest are taxable once they are generated - regardless of whether or not they are reinvested or if they’re swept to a cash/money market position.
Yes. The critical distinction is whether the account is a tax-qualified account or a tax non-qualified account. Setting aside Roths completely until the wrap-up to keep the discussion simpler. …
Traditional = non-Roth IRAs/401Ks are tax-qualified accounts. Anything of any description that goes on inside them is not taxable. Buy / sell / exchange are all non-taxable. Money entering them from the outside world due to dividends, interest, capital gains, etc., is not taxable. Anything transferred between one or another of those types of accounts is also not taxable.
The taxable event is moving money from inside the 401k/IRA wrapper to outside. The instant you do that, the money moved outside is subject to ordinary income taxes (net of any post-tax basis, which most folks don’t have much or any of).
Conversely …
A tax non-qualified account is anything held outside of a 401k/IRA wrapper. Such as checking, savings, brokerage accounts, CDs. For those, the taxable event is whenever the money enters your control.
So if some stock in that type of account pays a dividend, the instant the dividend is seen on your statement, it’s a taxable event and that value is taxable ordinary income. If you sell those shares at a gain, the gain is a taxable event at that moment and that value is taxable as capital gains.
As soon as you could spend that incremental money, it’s a taxable event. Whether you spend it, keep it, or move it to a different NQ account or don’t move it is all immaterial.
Its pretty simple once you internalize the three basic types:
Roth IRA/401K: Nothing is taxable ever while inside or when moved outside.
Traditional IRA/401K: The taxable event is moving money from inside the 401k/IRA wrapper to outside.
Non-Qualified = everything else: The taxable event is whenever the money enters your control.
Yeah, I don’t know why I was drawing a blank about non-taxability of dividends paid within an IRA. I had it all figured out a few months ago but I guess I needed a refresher. Thanks, all.
RMDs don’t kick in until the account owner is 72. I don’t think that includes you. Not sure about your spouse. So you may be able to ignore this problem for a few years.
Quite right. But if so I’d expect they’d already learned how to do that. I’m 65 and have been taking RMDs from my late Mom’s IRA since she died in 2008.
Eh, the IRS chart is fairly non-intuitive, and they bury it amongst 14 other RMD charts. I pulled the chart and equation into a Google sheet so that I have easy access to it - but Fidelity also does a good job of keeping me up to date on the requirements.