Question

What are the tax consequences of withdrawing from the following accounts?

-401(k)

-Roth IRA

-Brokerage account with $100k of unrealized gains.

Answer 1

Ans.1

Your Roth IRA withdrawals may be taxable if:

• You’ve not met the 5-year rule for opening the Roth and you are under age 59 1/2: You will pay income taxes and a 10% penalty tax on earnings that you withdraw. The 10% penalty may be waived if you meet one of the eight exceptions to the early withdrawal penalty tax.
• You’ve not met the 5-year rule but you are over age 59 1/2: Earnings withdrawn will be included as income and subject to income taxes but will not be subject to a 10% penalty tax.
• You’ve met the 5-year rule but are not yet 59 1/2: Earnings withdrawn will be considered as income and subject to income taxes and a 10% penalty tax. The 10% penalty may be waived if you meet one of the exceptions listed on page 28 of IRS Publication 590-B.34

Ans.2

Just like a checking or savings account, there are no tax consequences to moving money into or out of a regular, taxable brokerage account. However, there are numerous transactions that can occur within a brokerage account that can result in taxation. The most obvious is if you sell a security, whether it's a stock, bond, mutual fund, exchange-traded fund or any other capital asset. These types of assets generate capital gains (or losses) depending on the difference between the amount you paid and the amount you received after a sale.

Even if you don't sell any of your stocks or bonds, you can have taxable events in your brokerage account. When stocks pay dividends, that payout is taxable, even if you automatically reinvest the dividend into additional shares of stock. The same is true of bond interest, or the dividends you get on a money market or savings account. All of these types of income are taxable in the year in which you receive them, whether or not you take the money out of your account.