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Message
Tax gurus: IRA vs. Brokerage Account Distribution
Posted on 8/2/16 at 3:43 pm
Posted on 8/2/16 at 3:43 pm
My wife and I can contribute $5.5k each to a traditional IRA annually. Should I take that $11K and put it in a brokerage account instead? Understand the brokerage would be subject to capital gains, the IRA ordinary income rates.
1
Posted on 8/2/16 at 3:47 pm to Soft_Parade
quote:
My wife and I can contribute $5.5k each to a traditional IRA annually. Should I take that $11K and put it in a brokerage account instead? Understand the brokerage would be subject to capital gains, the IRA ordinary income rates.
no.
Are you referring to distributions at retirement? You don't pay taxes on the gains... (Every year)
Put in an IRA, preferably Roth IRA if you quality.
ETA: original statement was incomplete. Yes, you pay taxes on the entire distribution amount, but you don't pay ordinary income taxes yearly on gains in the account. Also, you get a tax break on the deposits into the IRA now.
Still, do the Roth if you can.
This post was edited on 8/2/16 at 5:45 pm
Posted on 8/2/16 at 4:14 pm to TigerDeBaiter
quote:
You don't pay taxes on the gains.
i thought you paid taxes on any gains when you withdraw the funds?
Posted on 8/2/16 at 4:37 pm to TigerDeBaiter
The 11K would be to a traditional IRA with after tax dollars.
Posted on 8/2/16 at 4:40 pm to Soft_Parade
quote:
The 11K would be to a traditional IRA with after tax dollars.
The 11K would be pre tax dollars because every dollar you contribute to a traditional IRA would be tax deductible.
Posted on 8/2/16 at 5:32 pm to yellowhammer2098
Not all the time and believe I have my answer since these contributions will be non deductible.
quote:
Form 8606 for nondeductible contributions
Any money you contribute to a traditional IRA that you do not deduct on your tax return is a “nondeductible contribution.” You still must report these contributions on your return, and you use Form 8606 to do so.
Reporting them saves you money down the road. That’s because no individual’s money is supposed to be subject to federal income tax twice. Form 8606 gets it “on the record” that a portion of the money in your IRA has already been taxed. Later on, when you take distributions, a portion of the money you get back will not be subject to income tax.
Posted on 8/2/16 at 5:46 pm to HailToTheChiz
quote:
i thought you paid taxes on any gains when you withdraw the funds?
Correct. I misunderstand his question.
Posted on 8/2/16 at 5:50 pm to Soft_Parade
quote:
Later on, when you take distributions, a portion of the money you get back will not be subject to income tax.
Why would you risk this being around in [however many years until you retire] vs taking the tax break now? Or just do the Roth?
You should have less income when you retire than now considering most people have house, cars, etc paid off. What would the advantage be?
Posted on 8/2/16 at 5:54 pm to TigerDeBaiter
I don't qualify for the Roth or tax deductible contributions to the traditional IRA. So I was trying to understand the tax implications of investing $11K after tax dollars in a traditional IRA vs. $11K in a brokerage account. Idea would be to begin withdrawals of either account in my early 60's.
Posted on 8/2/16 at 6:15 pm to Soft_Parade
Gotcha. Probably would be helpful to frame the OP with that reference. 
There are other vehicles out there that are better than a brokerage. HSA for sure, if you have a qualifying plan and don't already max that out.
I'm not familiar entirely, so maybe somebody else can chime in, but I've been "sold" life insurance plans that are billed as "unlimited Roth IRAs". I didn't pursue it, so I'm not sure all the details, but I know there are better avenues for retirement than a simple brokerage account.
There are other vehicles out there that are better than a brokerage. HSA for sure, if you have a qualifying plan and don't already max that out.
I'm not familiar entirely, so maybe somebody else can chime in, but I've been "sold" life insurance plans that are billed as "unlimited Roth IRAs". I didn't pursue it, so I'm not sure all the details, but I know there are better avenues for retirement than a simple brokerage account.
Posted on 8/2/16 at 6:57 pm to Soft_Parade
Look up backdoor Roth IRA. This is what I do as we don't qualify for deductible contributions to a traditional IRA just like yourself.
Posted on 8/2/16 at 9:47 pm to Big Saint
OP don't forget that your tax bracket at retirement will be lower most likely. I'm assuming you are over 30% tax bracket now, but how much income will you need in retirement? In retirement if all your income (or most) will be drawn from retirement accounts then you only have to withdraw exactly what you need to spend.
What is your age? If you are in your 50s then I agree it may make sense to go straight brokerage. But if you are younger, then I think your tax savings would be worth it.
What is your age? If you are in your 50s then I agree it may make sense to go straight brokerage. But if you are younger, then I think your tax savings would be worth it.
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