I am 65 and at the absolute peak of my income. I am also in the 35% tax bracket and have no intention of retiring anytime soon. I need $30,000 for a house project. I have enough to fund a non-qualified brokerage account, but I pay capital gains tax on what I spend. I’m thinking the best place to take it would be my Roth IRA so it doesn’t add to my tax bill. A home equity loan is out of the picture as I need this money fast. If you don’t accept Roth withdrawals now, when is the best time to withdraw from a Roth IRA? Our children are safe and do not need them as future inheritance.
While it’s important to want to minimize the tax impact of this individual project, it’s not the only consideration when deciding which account the money should come from.
Before using your Roth IRA In order to cover the cost of the project based on the short-term tax bill reduction, it is also important to consider the long-term tax bill. Financial planning Implications for opting out of each account and when.
I can answer your question generally, as it applies to most taxpayers, but caution that it is best practice to consult a tax professional who knows your full tax picture. (And if you need more help with your tax strategy, consider contacting A Financial advisor with tax knowledge)
Check your tax situation
As you remember, there are no immediate tax implications if you withdraw money from a Roth IRA once you turn 59 ½. Because you are in the 35% income Tax bracketThe price you pay Capital gains tax Depending on your tax filing status (married and joint, single or head of household) and your income, your taxable brokerage account will be 15% or 20%.
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Although it seems safe to assume that tax rates will be lower in retirement when you are not earning income from employment, I would caution against this assumption. Current income tax rates expire at the end of 2025 and are relatively low by historical standards.
Consider a taxable withdrawal
Generally, if you are not near the top of the 35% income tax bracket and face a 15% capital gains tax, it may be worth using yours. Broker account To withdraw while still having income to support current tax payments.
Additionally, while your brokerage account may indicate that you will be subject to capital gains tax when the total value is withdrawn, you should examine and consider the individual holdings in the account. Collecting tax losses Opportunities.
Given the volatile market conditions in 2022 and the declines in many asset classes, some holdings may have depreciated below your original value. cost basis, depends on your ownership and how long you’ve owned them. If that’s the case, you can sell depreciated assets and use those realized losses to offset capital gains elsewhere in the account and reduce your tax bill.
If tax loss collection is not an option, it may be another strategy A gift of appreciated securities to a charity. In doing so, you avoid paying capital gains tax and get a tax deduction on the full market value of the gifted property. The tax savings from this approach help offset any tax burden associated with removing a portion of the home project bill. (And if you need help collecting tax losses or donating securities to charity, ask a Financial advisor.)
The purpose of the Roth IRA
So, why pay taxes on withdrawals when a Roth IRA provides a tax-free source of funds? Because, generally speaking, it defeats the purpose of a Roth IRA.
Roth IRAs are designed to provide tax-free income. RetirementIt is not a tax-exempt source of general purpose funds. Unless you expect to collect a pension when you retire, it can be your primary source of income. Social security And your savings, including your Roth IRA. So, I believe with the information you provided about your situation, it is not wise to tap into a Roth IRA until after you retire, even if preserving the value for the next generation is not a primary consideration.
Roth IRA contribution limits They are already relatively low, and since you are above the income limit to contribute, this is the only way you can do so. background contributions. If you withdraw important funds before retirement, your ability to leverage your Roth IRA will be reduced. If you let the $30,000 in your Roth IRA continue tax-free, your savings will be more valuable in retirement. (And for more help managing your retirement accounts, consider Matching with a financial advisor.)
On the surface, withdrawing money from qualified accounts may seem like a good idea to reduce your current tax bill. However, you should consider the long-term tax implications of your withdrawal sequence and evaluate the purpose each account plays in your overall financial plan. With taxes, there is no one-size-fits-all advice, and Work with a professional It increases your chances of getting good results. Approaching a home improvement project—or any significant expense—in this way can produce results that align with your financial goals.
Tips for finding a financial advisor
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Consider a few consultants before settling on one. It’s important to make sure you have someone you trust managing your money. When considering your options, These are the questions. A consultant to make sure you make the right choice.
Lorraine Montaigne, CFP®, AIF®; He is a financial planning columnist for SmartAsset and answers reader questions on personal finance topics. Have a question you want answered? Email [email protected] and your question may be answered in a future column.
Lorraine is a Senior Retirement Planning Consultant at DBR & CO. She was compensated for this article. Additional sources from the author are available at dbroot.com.
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