Troubles for a traditionalist.
January 6, 2010 11:47 AM Subscribe
If I invest some IRA money in mutual bond funds, rather than stocks or equity funds, will it be a hassle to report profits down the road?
When it comes to IRAs, I guess you could call me a "traditionalist." My IRA is a traditional IRA, not a Roth. I set it up this way on the advice of my accountant, who ran the numbers, looked over the pros and cons, and decided that traditional was best. (There are many details behind this decision, but to save space I'll omit them here.)
Anyway, like most people, I've always invested the IRA money in equities--mutual stock funds.
This year, I'm leery of that move, with the rockiness of the economy. I'd like to wait a few months or years for a correction in the market before I commit to a mutual stock fund. (I know some people will say, "For a long-term horizon like 20-plus years, stick with equities, even in an unstable market." But I'm not comfortable with this philosophy right now.)
In the meantime, I'd like to park some funds in a comfortable, safe mutual bond fund like Vanguard Short Term Bond Index, which has a low-volatility NAV and delivers a small yield. This would mean that, in addition to monthly income, I'd have either a loss or gain to report when I sell the fund.
I won't begin withdraws from the traditional IRA for 20-plus years, so I don't have to worry about this now. But I don't want to unduly burden myself with reporting issues when I'm well into retirement and have forgotten the details of my income and trades.
Questions: What is the IRS's requirement on reporting investment income (in the form of dividends) from a mutual bond fund in a traditional IRA? If I need to report to the penny, how might I do this with the least paperwork--both now and 20 years from now? Does the additional paperwork involved make it irrational to invest in a bond fund rather than a stock fund (or stocks) in a traditional IRA?
I know you're not an accountant or my accountant, yada yada yada, but what advice do you have?
When it comes to IRAs, I guess you could call me a "traditionalist." My IRA is a traditional IRA, not a Roth. I set it up this way on the advice of my accountant, who ran the numbers, looked over the pros and cons, and decided that traditional was best. (There are many details behind this decision, but to save space I'll omit them here.)
Anyway, like most people, I've always invested the IRA money in equities--mutual stock funds.
This year, I'm leery of that move, with the rockiness of the economy. I'd like to wait a few months or years for a correction in the market before I commit to a mutual stock fund. (I know some people will say, "For a long-term horizon like 20-plus years, stick with equities, even in an unstable market." But I'm not comfortable with this philosophy right now.)
In the meantime, I'd like to park some funds in a comfortable, safe mutual bond fund like Vanguard Short Term Bond Index, which has a low-volatility NAV and delivers a small yield. This would mean that, in addition to monthly income, I'd have either a loss or gain to report when I sell the fund.
I won't begin withdraws from the traditional IRA for 20-plus years, so I don't have to worry about this now. But I don't want to unduly burden myself with reporting issues when I'm well into retirement and have forgotten the details of my income and trades.
Questions: What is the IRS's requirement on reporting investment income (in the form of dividends) from a mutual bond fund in a traditional IRA? If I need to report to the penny, how might I do this with the least paperwork--both now and 20 years from now? Does the additional paperwork involved make it irrational to invest in a bond fund rather than a stock fund (or stocks) in a traditional IRA?
I know you're not an accountant or my accountant, yada yada yada, but what advice do you have?
I thought the only thing that mattered for an IRA in terms of tax were your contributions. I could be extremely wrong, but I don't think you're ever required to do a breakdown of realized growth vs. dividend payouts. It's tax sheltered, after all.
posted by dave*p at 12:10 PM on January 6, 2010
posted by dave*p at 12:10 PM on January 6, 2010
For a traditional IRA, assuming your contributions were pre-tax, you only pay tax on the total withdrawal (distribution) as income. The capital gains / dividends / interest are not relevant.
posted by smackfu at 12:17 PM on January 6, 2010
posted by smackfu at 12:17 PM on January 6, 2010
The joy of most IRAs is that you don't have to worry about this at all. They don't care what you paid or made- they only care what you pull out and when.
posted by small_ruminant at 12:40 PM on January 6, 2010
posted by small_ruminant at 12:40 PM on January 6, 2010
Actually, I'm trying to think of an IRA that's not true of, and I'm not coming up with any off the top of my head.
posted by small_ruminant at 12:46 PM on January 6, 2010
posted by small_ruminant at 12:46 PM on January 6, 2010
You don't have any gains or losses on a traditional IRA. Because all of your contributions are tax deductable at the front end, all withdrawals are taxable at the back end. Principal and earnings are treated the same way when you made distributions, as far as the IRS is concerned.
posted by Midnight Skulker at 12:49 PM on January 6, 2010
posted by Midnight Skulker at 12:49 PM on January 6, 2010
ditto, but why are you so hesitant to get back into stock funds? I am up 37% from 1/1/09 to 1/1/10. Granted i have a pretty diversified bunch of stock funds, bond funds, and even some moneymarkets... Diversity is the key.
posted by Gungho at 1:14 PM on January 6, 2010
posted by Gungho at 1:14 PM on January 6, 2010
Tagging on to Gungho here - it's probably a good idea to diversify *some* of your IRA into bonds, but do remember that many city/state governments are running critically low on cash, so there could some default risk in the not-too-distant future (California, I'm looking at you!).
The other thing to remember is that, because this is an IRA, any 'income' (dividends/yield) are re-invested into the account, and do not come directly to you as income real-time. You gain from that as your account grows, and report on it when you start withdrawals, at which point, you may not even own these funds.
posted by dbmcd at 1:36 PM on January 6, 2010
The other thing to remember is that, because this is an IRA, any 'income' (dividends/yield) are re-invested into the account, and do not come directly to you as income real-time. You gain from that as your account grows, and report on it when you start withdrawals, at which point, you may not even own these funds.
posted by dbmcd at 1:36 PM on January 6, 2010
And tagging on some more, it sounds like your investment strategy relies on "market timing". There's a whole school of investing that believes this is a Bad Idea (in fact, they believe, and there's some evidence to support, that that is impossible to do consistently). They say that you should have a highly diversified portfolio that's allocated based on your aversion/tolerance of risk. And "risk" can be defined mathematically based on the long term historical performance of specific asset classes (i.e., large cap, small cap, real estate, emerging markets, etc.). If this interests you, reading The Four Pillars of Investing would be a good place to start.
posted by dave*p at 4:18 PM on January 6, 2010
posted by dave*p at 4:18 PM on January 6, 2010
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posted by JPD at 11:59 AM on January 6, 2010