I contribute to a Roth IRA, but I foresee my income levels in the future causing me to switch to a traditional at some point.
Is it true that distributions from a traditional IRA are taxed at ordinary rates even if the accumulation is from capital gains? If so, why? And does that mean that I should invest in individual stocks and mutual funds in my regular brokerage account and restrict my trad. IRA investments to ordinary income producing investments like bonds? I cannot stand to think of converting capital gains income to ordinary income even if the initial investment is tax deductible.
Also, are those rules the same for 401(k) distributions?
Thanks for any clarification or advice!
I am aware that is the law which is written by congress… that’s why I’m asking is it better to use all IRA funds for ordinary income producing investments and keep capital gain producing investments in a taxable account since there is already a deferral and (probably) preferential rates?
Also, I do not expect to have income that "per year varies considerably". I expect to have steadily increasing income until I retire.
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Why?
Because congress wrote it that way.
Yes, pulling money out of a TAX DEFERRED account is always ordinary income. This includes IRAs, 401(k)s, HSA, annuity income, etal.
If you "can’t stand the idea" then stick to Roths.
My income per year varies considerably. I plan to retire early and will have several years of "no income" for tax purposes–I’m using the 401K/IRA to lower taxes now and create taxable income later. In a year I was out of work, I moved IRA money that I’d avoided taxes at 28-33% from the IRA to the Roth. The amount to cancel out my itemized deductions and personal exemption were then taxed at 0%. The next portion was at 10%. That was a huge savings right there.
Yes, they are - because the contributions you PUT IN to a traditional IRA are pretax money - you haven’t paid tax on it yet. The fact that some of the returns within an IRA may be from capital gains is relatively minor. And regardless, that’s the law.
You have two smart answer of the tax lady and Emptor right there. In addition to their answer.
Because of the law, you have to use the law to your advantage until the law change.
The maximum for capital gain tax is 15% for the rich, 5% for lower income bracket. It is wise to put your stocks or securities purchase in regular brokerage account. Put your bond or income producing in Tax Defer account to avoid your tax bracket or your marginal tax rate would be a wise choice. Until the law change, use it in your advantage.
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