I’m 65 and at the absolute peak of my income. I am also in the 35% tax bracket and am not looking to retire anytime soon. I need $30,000 for a real estate project. I have enough to withdraw it from an unqualified brokerage account, but I will pay capital gains taxes on what I liquidate. I think the best place to take it would be my Roth IRA so it doesn’t increase my tax bill. A home mortgage is not in the picture because I need that money fast. If you were to say no to Roth withdrawal now, when is a good time to withdraw from the Roth IRA? Our children are well off and don’t need it as a future inheritance.
While it is important to seek to minimize the tax impact of this individual project, it is not the only consideration when deciding which account the money should come from.
Before using your Roth IRA to cover the cost of the project due to the minimization of the short-term tax bill, it is also essential to consider the long-term tax and financial implications of withdrawing from each account and when.
I can answer your question generally as it would apply to most taxpayers, but I will caution you that it is best to consult a tax professional who is fully familiar with your complete tax situation. (And if you need more help with your tax strategy, consider partnering with a financial advisor with tax expertise.)
Examine your tax situation
As you note, there would be no immediate tax implications if you withdraw the funds from your Roth IRA since you are over age 59½. Because you are in the 35% tax bracket, the rate you pay on capital gains from your taxable brokerage account will be 15% or 20% depending on your tax status (married and filing jointly, single or head of household) and real income.
While it may seem prudent to assume that tax rates will be lower in retirement when you will no longer be receiving employment income, I caution against this assumption. Current tax rates are due to expire at the end of 2025, and they are relatively low by historical standards.
Consider a taxable withdrawal
Overall, if you’re not near the top of the 35% tax bracket and facing 15% capital gains tax, it may be a good idea to use your brokerage for withdrawal while you have income to support the current tax bill.
Additionally, while the total value of your brokerage account may indicate that you will incur capital gains taxes on a withdrawal, you should review the individual holdings in the account and consider opportunities for tax loss reaping. .
Given the volatile market environment and declines most asset classes have experienced in 2022, some assets may have fallen in value below your original cost, depending on what you own. and how long you’ve owned them. If so, you could sell some of the assets that have lost value and use those realized losses to offset capital gains elsewhere in the account, reducing your tax bill.
If harvesting tax losses is not an option, another strategy would be to donate appreciated securities to charity. By doing so, you will avoid paying capital gains taxes and receive a tax deduction equal to the full market value of the donated assets. The tax savings from this approach could help offset any tax burden associated with winding up part of your taxable account for the house project. (And if you need help reaping tax losses or donating securities to charity, consider working with a financial advisor.)
The Purpose of a Roth IRA
So why pay taxes on a withdrawal from your taxable account when a Roth IRA provides a tax-free source of funds? Because, generally speaking, that would defeat the purpose of a Roth IRA.
Roth IRAs are designed to provide tax-free retirement income, not a tax-free source of general purpose funds. Unless you plan to receive a pension or passive income in retirement, your main sources of income will likely be Social Security and your savings, including your Roth IRA. Therefore, I believe that with the information you have provided about your situation, it is not wise to operate a Roth IRA until retirement, even if preserving its value for the next generation is not not a primary consideration.
Roth IRA contribution limits are already relatively low, and since you’re above the income threshold to contribute, you can only do so through disguised contributions. Your ability to leverage the power of a Roth IRA will be reduced if you withdraw valuable funds from it before retirement. Your savings will be more valuable in retirement if you allow the $30,000 in your Roth IRA to continue to accumulate tax-free rather than allow the funds in the unqualified brokerage account to accumulate as taxable gains. (And for more help managing your retirement accounts, consider hiring a financial advisor.)
At first glance, it may seem ideal to withdraw money from qualified accounts to minimize your current tax bill. However, you need to consider the long-term tax implications of your withdrawal sequence and assess the purpose each account plays in your overall financial plan. With taxes, there is no single recommendation, and working with a professional will increase your chances of achieving optimal results. Approaching a home improvement project – or any major expense – in this way will yield results that best align with your financial goals.
Tips for finding a financial advisor
Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three vetted financial advisors who serve your area, and you can interview your advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
Consider a few advisers before settling on one. It’s important to make sure you find someone you trust to handle your money. When considering your options, here are the questions you should ask an advisor to make sure you make the right choice.
Lorraine Montanye, CFP®, AIF®, is a SmartAsset financial planning columnist and answers readers’ questions on personal finance topics. Do you have a question you would like answered? Email AskAnAdvisor@smartasset.com and your question might be answered in a future column.
Loraine is Senior Pension Advisor at DBR & CO. She was paid for this article. Additional author resources are available at dbroot.com.
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