No. of Recommendations: 2
kelbon,
The 2013 rates for income tax and capital gains/qualified dividends:
Inc. CG/QD
10% 0%
15% 0%
25% 15%
28% 15%
33% 15%
35% 15%
39.6% 20%
I do not see any bracket jump where a reasonable reduction of income at retirement will make paying taxes on income better than paying taxes on capital gains and/or qualified dividends.
I know you will say, "But the returns are lower in taxable because they have to take money to pay the current year taxes, reducing capital."
My answer: No. Most people pay taxes from earnings. They do not sell securities in their brokerage account to pay them. (Ok, except me since that is what I live on.)
You mention 70 1/2, which is partially correct. In trad accounts, you will be forced to take distributions starting, normally, in the year you become 70 1/2. This is a 2-edged sword.
If you live below your means, have your SSA coming in and maybe a small pension, you may not need the nearly 4% withdrawal you are forced to take because of the RMDs. In this case, you are required to take a distribution you do not need and you pay income tax on it.
Some people will save the RMD or invest it. Others may just spend(waste) it since it is "extra cash" or "mad money".
The downside here, if you are a good saver/investor in the above situation, the RMDs can push you into a higher tax bracket for money you do not need. In a taxable account, you aren't required to sell hence do not pay the tax.
The one advantage to putting dividend payers into a trad IRA is for dividend reinvestment. Over a long period of time, maintaining cost basis on lots of small dividend purchase lots can be tedious in a taxable account when you do sell. You pay more in taxes for it but it is simpler.
Gene