For retirement income, stop selling high-quality securites (with dividends) and start withdrawing from IRA?

[DD660]

I'm trying to model what our tax load would be if we did this versus selling a lot of a very desirable stock to derive monthly income?  I'd rather not start selling this stock. Plus, we bought it at a good price and capital gains could be $30,000 in a full year.  My wife has a sizable IRA, she is over 65 yrs. and 6 years away from having to take disbursements from the IRA.

Annually, the amount of IRA income would equal the amount of capital gains income annually.

Are capital gains and IRA income treated in the same manner regarding taxes?

Thx DD

[VolvoGirl]

No.  Stock and investment sales get Capital Gains treatment and may have lower tax.   IRA withdrawals are taxed as ordinary income.  Unless it is in a ROTH IRA.   

[rjs]

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@DD660 wrote:

Are capital gains and IRA income treated in the same manner regarding taxes?

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No, they are not treated the same. Short-term capital gains and distributions from a traditional IRA are both taxed as ordinary income. Long-term capital gains are taxed at lower rates. Capital gains, both short-term and long-term, may be subject to 3.8% Net Investment Income Tax in addition to regular income tax if your Modified Adjusted Gross Income (MAGI) is over $250,000 (for married filing jointly).

[DD660]

Thx for the info. So, long term is 12 months of greater?  Any idea of the rate difference for long versus short? 

[rjs]

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@DD660 wrote:

So, long term is 12 months of greater?

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Not exactly. One year or less is short-term. Long-term is more than one year.

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@DD660 wrote:

Any idea of the rate difference for long versus short? 

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It's complicated. There is a separate bracket structure for long-term capital gains, different from the regular income tax brackets. The attached PDF shows the 2024 brackets for qualified dividends and long-term capital gains. Note that the brackets are based on total taxable income, including the capital gains and all other taxable income. Taxable income is basically Adjusted Gross Income (AGI) minus either the standard deduction or itemized deductions and the QBI deduction. For determining the tax rate, the long-term capital gains are "stacked" on top of your taxable ordinary income. So for example, using the 2024 rates for married filing jointly, suppose you have $90,000 of ordinary taxable income and $10,000 of taxable long-term capital gain. The first $4,050 of the capital gain will fall in the 0% bracket. The remainder will be taxed at 15% (up to a total of $583,750 of taxable income).

If you live in a state that has state income tax, you might also want to consider the state tax. Most states do not have lower rates for long-term capital gains like the federal tax does. All types of income are taxed at the same rates. Some states may also treat IRA distributions and other retirement income differently from other income.

This answer is based on the current tax law for 2024. Some of the relevant provisions will expire after 2025. So the situation could change beginning in 2026, depending on what, if anything, the new Congress does about the expiring provisions.

[Opus 17]

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@DD660 wrote:

Thx for the info. So, long term is 12 months of greater?  Any idea of the rate difference for long versus short? 

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If your regular income plus your capital gains puts you in anywhere in the zero-24% tax bracket, the long term gains are taxed at 15%.  If your regular income plus capital gains puts you in the 32% or higher tax bracket, long term capital gains are taxed at 20%.  (Plus 3.9% net investment tax in some cases.)

The bottom line is that long term capital gains are always taxed less than ordinary income, and withdrawals from a traditional IRA are taxed as ordinary income.   For the IRA, you got a tax deduction originally, so you were able to invest more money, and it grew tax-free, so you pay tax on everything when you withdraw it.  But the other investments were made with after-tax dollars and you likely paid tax on dividends as you went along, so now only your gains are taxed.  When you are investing before retirement, you want to think about what mix of traditional IRA, Roth IRA, and regular investments you want.  But now that you are retired, withdrawing investment funds will be lower tax that withdrawing from an IRA.