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URL:  http://boards.fool.com/greetings-evenstar-and-welcome-you-asked-ive-10344642.aspx

Subject:  Re: Taxes due at withdrawal Date:  9/29/1998  5:36 PM
Author:  TMFPixy Number:  5728 of 76237

Greetings, Evenstar, and welcome. You asked:

I've recently realized that there's something I don't understand about the taxes we'll need to pay on a traditional IRA. My understanding is that we'll pay ordinary income taxes on withdrawals at our tax rate at that time. Does this include taxes on the earnings? Or do we pay capital gains on those? If the latter, do we pay the capital gains rate at the time of the withdrawal or at the time the gain occurred? And who decides what proportion of what we withdraw is contribution and what is earnings?

We've been assuming we could ignore capital gains implications of any trading we do. Is that true?


Joe Varga gave you a great reply with examples, so there's not much I can add. If you haven't read his reply, you should. Just keep in mind that all earnings and all previously untaxed contributions in a traditional IRA are taxed when withdrawn at the ordinary tax rates in effect at that time. Because of that, there are no capital gains implications in an IRA investment. If you have a mixture of deductible and nondeductible contributions in your IRAs, then part of any withdrawal will avoid taxes and part will be taxed. The computations are as described by Joe. See IRS Publication 590, Individual Retirement Arrangements, for details. You can get that Pub at: http://www.irs.ustreas.gov/prod/forms_pubs/index.html

Regards….Pixy



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