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In my research to decide if I should go Roth or not, and convert or not, I uncovered a tid bit I didn't realize. I had already decided to go Roth when I found this out and now I'm more convinced.

In a regular IRA you are converting capital gains (which are taxed at a lower rate) into ordinary income (taxed at a higher rate). When you withdraw from the IRA, the income is taxed as ordinary income even if it comes from capital gains! What a rip off! I guess it's the damn governments way of taking back some of the benefits of IRA's. Maybe they did it because they knew most people wouldn't realize this dirty little secret!

So for those who don't qualify for a Roth or for another reason are better off not in a Roth, they would actually have to figure out if they are better off in a taxable investment rather than in an IRA! Which could be a very difficult calculation since it would involve forcasting the future!

I'm in what seems to be a rare position, which makes it fairly easy to know that a Roth would be best. My future tax rate is likely to be HIGHER than current. When I retire I may very well be in a HIGHER tax bracket since I'm in the 15% bracket now and, with the growth of my investments and the capital gains I'll have to pay later, my income may be pushed into the next bracket. So it makes sense to not take the deduction now and take the money out tax free then.

Did most Fools know this about the conversion of capital gains into ordinary income?

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