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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 74759  
Subject: Re: IRA for post 65 yr olds Date: 12/6/2010 12:13 AM
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Here's my dilema all my income when I withdraw it is taxed as regular income so I lose the low rate for capital gains and can not use an occassional taxable loss to offset a gain.

You seem to be forgetting that you already took advantage of the tax break when you contributed to the account and that are continuing to take advantage of the continued tax deferral as you sell gainers for any reason (including mergers, acquistions, takeovers, etc.), not just because you need to take the income.

If I'd cash out everything in 2010 the tax rate would be 36% as over $200 K would be withdrawn

Actually for 2010, the federal rate would be 35%, not 36%. And assuming that you are not filing Married, Separate, you would only be paying 35% on the taxable income above $373,650. That means if your current balance on your IRA is $200k, you would have to have other taxable income (after considering deductions & exemptions) of more than $173,650 to pay any tax at 35%.

but if gains in the future are taxed at 15 to 20% every year in the future I would be saving taxes.

Only if capital gains rates remain lower than ordinary income rates. They haven't always been, and there have been several proposals to tax capital gains at ordinary income rates.

And at a 36% tax rate, even if you assume that your tax rate will be going up to 28% in future years, you are still paying 8% more now than you would spend then.

Additionally, not all income is taxed at your marginal rate - at a marginal rate of 28%, your average tax rate may only be 18%.

Now, let's run some numbers.....

Let's say that of your $200k withdrawal, $100k of it gets taxed at the 35% rate, so you end up with $65k after your taxes are paid. Let's further assume that you subsequently have $35k in gains (a 53.84% gain) and those gains are taxed at 20%, or $7k. So your total tax bill for this would be $42k, and you would end up with $93k in after-tax income.

Now, if you had left the $100k in the IRA, and it had grown at the same 53.84% rate, you would have $153.84k. Let's say that all of this income gets taxed at a 36% rate (unlikely because of inflation indexing and the bracket structure, but for a worst-case scenario, we can use that assumption) That would mean that your tax bill on the IRA would be $55.38k, and you would end up with $100.46k in after-tax income, or $7.46k more than if you paid the taxes now and then paid the 'lower' rate later.

Yes, you would end up paying more in total taxes, but you would also net more because you aren't depleting your capital now in order to pay taxes before you have to.

AJ
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