60 Minute Finance
CPA and Financial Counselor
Born and raised in Virginia, John passed the CPA exam before graduating from Virginia Commonwealth University and beginning his career at a “Big-8” accounting firm in 1987.
After two years in public accounting, he accepted employment with a client and rose through the ranks in private industry. Desiring to work in a more diversified environment, John started his own accounting practice in 2000 and added personal financial coaching services in 2013.
John resides in Hanover County, Virginia with his wife and children. He is active in his church, enjoys finishing a good run or workout at the gym, and leads personal finance classes in the community.
In addition to 60 Minute Finance, John is also the owner and president of Riverpine Services, Inc. Riverpine Services, Inc., provides freelance accounting services to a select number of small businesses throughout the region. In 2016, John moved to a part-time roll with Riverpine to focus his attention and energy on his personal financial education efforts.
BS, Accounting, Virginia Commonwealth University
The recommendations provided are educational in nature and not intended to be specific recommendations for any particular individual. The goal is to educate and inform readers of available options, with the ultimate decision being theirs. Please consult the appropriate tax, investment, insurance or financial planning expert before making any final decisions.
Capital gain taxes are reported on the return for the tax year of the sale. So for your example, any capital gain taxes due from your condo sale would appear on your 2017 return. Unless you completed a 1031 exchange, what you did with the proceeds of the sale will not impact the capital gain taxes that would be due (if any).
I can't determine from your question, but if the condo you sold was your personal residence, no capital gains would be due (as long as it was your personal residence for 2 of the last 5 years). Even if it was rental property, you may not owe taxes on the sale. It would depend on your cost basis in the property. Further, the sales price of $170,000 could be reduced by expense of sale, such as real estate commissions. Check with your local tax professional to assess your exact situation.
Thanks for your question.
If you could accurately predict when the next market crash would occur, you'd know what to do regarding the conversion (and when to do it). Unfortunately, none of us can predict when it will happen! I'd recommend moving forward with the conversions, perhap spread over several years depending on your tax rate, when you have the funds outside of the retirement account to pay for the taxes due from the conversion. By spreading it out over several years, should a market correction occur, some of your conversions would be at reduced prices. However, if the bull market continues, you'll have at least some of your conversions completed at today's lower prices.
Again, do the conversion(s) when it makes sense for your situation. Don't try to time the market! Many investors have been on the sidelines since 2010/2011 convinced that the market was getting ready to correct. Their error has caused them to miss out on the fantastic returns over the last seven or eight years!
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It's clear that you're concerned about the recent market volatility and you're certainly not alone. Risk analysis is more than just understanding your risk tolerance. It also includes understanding your capacity for risk (ex. are these your last dollars?) and your need for risk (ex. do you need certain returns on your investments in order to meet your financial goals?).
You've accumulated a very nice nest egg in your 401(k) and your withdrawal needs are relatively small. Even if you move the $800k to an account paying no real return (ie, return above inflation), it would take 26 years to use up what you already have saved! In other words, you don't necessarily NEED to take on a lot of risk in order to meet your financial goals. If you're losing sleep over the markets, I see no problem with you moving to safer asset classes.
I would recommend a very modest amount stay in a low-cost, well diversified index fund (or two) to provide you the opportunity to pick up long-term gains. This isn't necessary, but I like the idea in case you (or both) of you survive beyond current life expectancy. The next 10 years cash needs can be invested in FDIC insured money markets (I use one that is currently earning 1.75%), with the balance in a high quality, short term bond fund to earn a bit more than a money market fund.
Your RMD's will start soon and will quickly exceed the $30k per year you'll need. Take your RMD (when they start) early each year. Set aside the $30k you'll need for that year in a savings account that will transfer $2,500 each month to your checking account for your expenses. The balance of the RMD should be invested like mentioned above (but in a taxable account instead of your 401(k), of course).
Lastly, depending your tax bracket, you may want to consider a small Roth conversion each year, if you have other funds available to pay the tax due on the conversion. This will shelter some of the interest you're earning from taxation, and if left your heirs, it will be tax-free to them, too.
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Dividends are taxable when received, even if they are reinvested (Note: you will get an increase in your cost basis for the holding by the amount claimed as income). She should have claimined them as income regardless of her age. Depending on the amount of the dividends, she may have owed tax based on her parent's tax rate. You may want to consult a local tax professional to determine whether she needs to file back tax returns.
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I would not recommend paying off the house with a 401k withdrawal of that amount. The withdrawal will be taxable in the year it's withdrawn, which would most likely place you in a higher than normal tax bracket. You may want to consider spreading the withdrawals out over several years to reduce the tax burden. Or, simply take a distribution each month in the amount of the house payment. This will eliminate the mortgage payment from your monthly budget and keep the taxes to a minimum.
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