- quote -

Thank you to everyone for the replies...

OK no long term cap gain rate break for IRA's at least that
makes it easier to figure out what to do...

thanks

Mark

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Mark wrote:

- quote -

As I read your post, you have a good grasp of the issues.
Yes, for the non-deductible IRA there is a form you file
every year (form 8606) to track what post-tax money went in.
And yes, the IRA magically turns long term gains into
ordinary income rates, as does my 401k. It's worse than
Roth, buth some taxpayers are above the Roth income cutoff
level and can only do the non-deductable IRA.

JOE

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Mark,

By way of background, I am a retired (early) tax attorney
and CPA who specialized in retirement plans. I worked my
entire career in CPA firms where we always did a lot of
financial modelling on spreadsheets under various what if
scenarios. We always tried to come up with the factual
situations where either tax deferral of income makes sense
or it does not. The general guidelines are that tax
deferral of current income makes more sense when the
following factors are present: (1) the higher the current
tax rate, the more it makes sense to defer (2) the higher
the interest rate assumed on IRA investments, the more tax
deferral of interest income makes sense (i.e., the earnings
on your investments that would be taxed each year if you
invested after-tax outside the IRA), and (3) the longer the
assumed deferral period, the more deferral makes sense.

So, based on the above, if you have low tax rates now, and
if you have low interest on your IRA investments, and if
you're going to leave the money in the plan just a few
years, the advantages of the tax deferral is not very great.

BUT I digress. The answer to your last series of questions
is that: ALL distributions from your IRA (or 401k) are taxed
as ordinary income. NO long-term capital gain tax rates
apply in this situation. So your "nightmare" scenario is
not an issue.

As you know Roth IRAs are not available to everyone -- only
those below certain income levels. Also, these require the
payment of current taxes. Based on the modeling factors I
describe above, there are many times when current deferral
in a deductible IRA makes more sense than the Roth IRA. The
key factor to look at is your time horizon -- if the
standard IRA amounts will be distributed (and taxed) over a
very long period of time, then the tax deferrals keep
growing inside the IRA for a longer period of time and the
IRA balance can get to be quite large. They can even be
passed on to children and grandchildren. So the Roth is not
always the better deal, even when it is available.

Hope that helps,
EBT

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- quote -

No they are taxed at earned income rates.
Some tax advisors recommend putting lsome ong term savings
into broad market index funds (minimal turnover
distributions and good diverstication) to be in lower tax
brackets when withdrawing.

If history is a guide, predicting tax brackers 10 to 50
years out is a crapshoot. Carter reduced captial gains in
1977 (creating Silicon Valley and venture capitalism); Regan
undid it in 1986; Clinton restored it. Likewise earned
income tax brackets have gone up and down over the decades.
So I'd advise a mixture of long term investments.

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"Mark" <makolber[at]yahoo.com> wrote:

- quote -

Yes. This is one of the few "no brainers" in tax law.

- quote -

No. All taxable distributions from a traditional IRA are
taxed as ordinary income, regardless of the investment
history within the IRA.

--
Phil Marti
Clarksburg, MD

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"Mark" <makolber[at]yahoo.com> writes:

- quote -

Yes.

- quote -

It *is* always worse.

- quote -

No. All taxable distributions are taxed as ordinary income.

- quote -

Yes.

- quote -

Earnings are taxed as ordinary income. Contributions are
not taxed coming out.

- quote -

Wrong. It's actually very simple.

- quote -

You use the traditional IRA part of Form 8606. In the year
of the first distribution you basically you take the total
amount of all non-deductible trad IRA contributions ever
made. Then you compute the total value of ALL your
traditional IRA accounts. You divide the two to determinine
what percentage of total value is non-ded contributions, and
then multiply that percentage by the amount of the
distributions that year to determine the non-taxable
portion. Then on 1040 you report the total distribution in
line 15a and the taxable amount in line 15b and carry on
from there. The next year you take a contribution, you do
the same thing, except that you now use the remaining
non-ded contributions. That sounds complicated, but it's
only about 10 trivial lines on Form 8606.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

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IRA / Roth IRA and Long Term Capital Gain Questions

I'm trying to understand some details about the tax laws.
Do I have this correct?

Assume tax bracket is the same going in and going out.
Assume the standard cases, not interested in the exceptions
due to AGI limits etc. right now..

Standard IRA contributions are deductible and taxed deferred.
Standard IRA contributions are taxed when distributed.
Standard IRA earnings are taxed when distributed.

Roth IRA contributions are taxed (like all other income)
Roth IRA contributions are not taxed when distributed (they
were already taxed)
Roth IRA earnings are not taxed.

The combination of the above means that numerically, the
standard IRA and Roth IRA have the same net assuming the
same tax brackets going in and out. Correct?

OK now lets add a wrinkle, assume I am covered by a pension
plan so I can still make contributions to a standard IRA but
I cannot deduct contributions to a standard IRA.

So now...
Standard IRA contributions are NOT deductible (due to
pension plan coverage). These standard IRA contributions are
NOT taxed when distributed (they were already taxed).
Standard IRA earnings are taxed when distributed. Correct?

The standard IRA without deductions seems always worse
compared to the Roth...correct?

OK

Now, what if my standard IRA account is in a long term
capital investment? Are the distributions from the standard
IRA earnings taxed at the long term cap gain rate? What if
the contributions are also taxed, does the distribution have
to be split into earnings and contributions and each taxed
at different rates. Seems like a nightmare. How is this
handled form wise?

It still seems worse compared to the Roth... correct?

thanks

Mark

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >