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URL:  http://boards.fool.com/evenstar-writes-ive-recently-realized-that-10344836.aspx

Subject:  Re: Taxes due at withdrawal Date:  9/29/1998  7:35 PM
Author:  Bob78164 Number:  5733 of 75385

Evenstar writes:

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?


I reply:

It's true. All of your IRA earnings will be taxed upon withdrawal as regular income, not capital gains. For this reason, depending on your individual situation, it can make sense to save in a taxable account rather than a tax-deferred IRA.

The IRS decides how much of your withdrawal is contribution and how much is earnings. To be precise, your withdrawals are attributed pro rata between earnings and contribution. --Bob
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