If I have an IRA Index Mutual Fund, are the capital gains generated considered part of the "interest" accumulated at retirement or do I pay a seperate capital gains gains tax on these earnings?
There are no taxes on interest, dividends or capital gains on investments held in an IRA. You pay ordinary income taxes on any amounts withdrawn from the IRA at "retirement". If you're talking about a Roth IRA, then you pay no tax at "retirement" --- gopete
gopete,Your post has prompted me to ask this question of you:Is this also true with 401Ks?Also, much of our 401K is in company stock, but it is referred to as a "stock fund." We put some of this stock money into other funds within the 401K, but this original stock money (it was our "match" from the company) is still somehow tagged as stock money. I'm wondering how this effects our distribution when the times comes, and if there is no effect, why is it tagged?Also, I've read that stock cannot be rolled over to an IRA, and can instead be either sold to roll it over or it can be taken as stock with no tax payments until it is actually sold. One way or the other is supposed to be more beneficial, but I can't find any information on this.Thanks,jmbellv
401(k)s, like regular IRAs, are tax defered - the money that goes into them is before taxes, and what you get out when you eventually take your distribution is taxed at whatever your income tax rate is at the time. I've never heard of the restriction on the stock that you mention. Some brokerage companies (e.g. Fidelity) offer rollover IRA accounts that allow you to have your assets invested in all different types - mutual funds, stocks, bonds, money markets, etc. One possible reason you couldn't move assets to a rollover "in-kind" would be the case of a mutual fund not available through that company. You'd have to liquidate and transfer the cash. I wouldexpect the stock of a publicly traded company to be transferable in-kind. If your company is not yet public, they probably could impose whatever restriction they want on transfer of the stock...Perhaps the restriction on the stock in your 401(k) is part of a vesting plan. When employers provide matching contributions to the account, a vesting period is often imposed. The money they contribute is not completely "yours" until the period expires several years later, with a percentage becoming vested over each year. Perhap the restriction on what you can do with the stock is on the unvested portion?Cheers,FelineAvenger(Disclaimer: I'm not a financial professional, this is just a lay person's understanding of how it works...)
re ROTH IRA this is somehting I am curious about too. Explain what is taxed on a Roth if over the next 20 years $2000 (and more if they increase it) is put in each year. We wouldn't pay ANY tax on the gains OR the incme even upon distribution? Say we take it ALL out? no penny would go to the IRS?Just trying to understand,OiVey
Nothing. You take your principle and anything over that your earned in the account tax free when you retire.
oiveyisme: <<<<re ROTH IRA this is somehting I am curious about too. Explain what is taxed on a Roth if over the next 20 years $2000 (and more if they increase it) is put in each year. We wouldn't pay ANY tax on the gains OR the incme even upon distribution? Say we take it ALL out? no penny would go to the IRS?>>>> avjo: "Nothing. You take your principle and anything over that your earned in the account tax free when you retire."ASSUMING THAT THE RELEVANT TAX LAW DOES NOT CHANGE IN THE INTERVENING YEARS. I have danced around this topic with either TMFPixy and/or TMFTaxes, especially WRT to potential grandfathering and limits of changes. In addition, national sales tax in lieu of income tax would make this mney taxable as spent.Regards, JAFO
> Explain what is taxed on a Roth if over the next 20 years> $2000 (and more if they increase it) is put in each year.> We wouldn't pay ANY tax on the gains OR the incme even> upon distribution? Say we take it ALL out? no penny would> go to the IRS?That's the beauty of a Roth - you've already paid the tax up front, since contributions to a Roth are not tax-deductible. But when you take your distribution later, the gains are completely tax free. Keep in mind that you do have to keep your money in until you reach a minimum age (59 I believe) and also a minimum of 5 years, if I understand correctly. On the other hand, because the tax is already paid, there is no minimum required distribution at 70 1/2 like there is for a traditional IRA or 401kFelineAvenger.
Feline Avenger,I think I'll need to talk to the 401k people at work. Vesting is not the problem, and the company is indeed publicly traded. The only thing I can make out is that the stock money is always referred to as a stock fund, and price is quoted in "equivalent shares," or at least it used to be until about a year ago when Fidelity took over managing the plan.It's good to know that only income tax would come out, and we don't have to agonize over the cost basis, captial gains, etc. I didn't realize this was the case, and it would have been a difficult task since we've had this plan since about 1978.Thank you for your insight.jmbellv
> It's good to know that only income tax would come out, and> we don't have to agonize over the cost basis, captial gains,> etc. I didn't realize this was the case, and it would have been> a difficult task since we've had this plan since about 1978.Sometimes the agonizing is worth it - though people might place different values on the opportunity cost of not dealing with the hassle of figuring it all out. But long term cap gains are taxed at a lower rate than regular income tax, so it could well be worth it if good records are available.Oh well. a 401k is a pretty good deal anyway considering the tax deferal in the first place.Cheers,FelineAvenger
jmbellv --- Yes, the same applies to investments held in a 401K. You only get taxed when you start withdrawals as ordinary income. However, you can rollover the 401k either partially or entirely into an IRA. If you choose a self directed IRA, the stock can be rolled over as well (check out Vanguard, Fidelity, TDWaterhouse for self directed IRAs). you should also consider taking the stock as an "in-kind" distribution whereby you keep the stock in a taxable account and only pay a tax on the cost basis of the stock when you receive it as a 401K distribution.Your company 401k plan administrator can help you out with this. In this case, the capital gains are taxed at your caital gain rate when you decide to sell some. I found this approach useful when I rolled over the cash part of my 401k. Good luck --- gopete
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