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I have been reading these posts trying to get educated. Do i understand correctly that the money that is made off the investments in an ira is not subject to short or long term taxes capital gains taxes???
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I have been reading these posts trying to get educated. Do i understand correctly that the money that is made off the investments in an ira is not subject to short or long term taxes capital gains taxes??? - LA7676

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Roth IRA = Ordinairy tax on deposits going in. No tax at all on withdrawals.

Traditional IRA = no tax on deposits going in. Ordinairy tax on all withdrawals. Thus LT gains in a traditional and dividends in a traditional end up getting taxed your ordinairy marginal rate when when withdrawn. This is why some favor after tax accounts for LTBH and income producing portfolios.
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But you can make almost any transactions you want within the IRA or Roth IRA account without incurring any taxes. You can buy and sell stocks or bonds or mutual funds at will. You can move the account to another custodian. All of these are tax free transactions as long as you abide by the rules.

Roth IRA is tax free when you take distribution according to the rules in retirement. Traditional IRA avoids the penalty when you take distributions according to the rules (usually after age 59-1/2), but the distributions are taxed as ordinary income.
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Traditional IRA = no tax on deposits going in.

Not always. If you qualify, you can make deductible contributions to a Traditional IRA. However, it is possible to make non-deductible contributions (assuming one has suitable taxable compensation and isn't 70.5 years old yet, file IRS 8606 with one's tax return) even when one doesn't qualify to deduct contributions.

Then when money comes out, the part of the money representing the "Tax Basis" (non-deductible contributions) is not taxed, but the rest (deductible contributions and "gains") are taxed at ordinary income tax rates.
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Traditional IRA = no tax on deposits going in.

Not always. If you qualify, you can make deductible contributions to a Traditional IRA. However, it is possible to make non-deductible contributions (assuming one has suitable taxable compensation and isn't 70.5 years old yet, file IRS 8606 with one's tax return) even when one doesn't qualify to deduct contributions.

Then when money comes out, the part of the money representing the "Tax Basis" (non-deductible contributions) is not taxed, but the rest (deductible contributions and "gains") are taxed at ordinary income tax rates. - Mark12547


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Thanks for pointing that out. This needs to be mentioned to complete the picture. However I don't think it make sense to put after tax money into a traditional IRA when those same dollars could be put in a Roth instead.
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Mark with the numbers, you are absolutely correct.

The problem with that is the bookeeping nightmare that easily could erupt.

You make three years of non-deductible contributions in your thirties, then you wait thirty more years and take RMD but you will be forced to account for the non-deductible contrib.

Can you remember that? Can your bene remember that?

That said for most people non-deductible contributions are likely more hassle than they are worth. Unless you are diligent about your contributions you will pay taxes on them again.

Some people can make it work but it is another pitfall in retirement distributions that can easily be avoided.

You are absolutely correct-I believe there are problems down the road with this technique for most people.

Respectfully,

Buz Livingston

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"Thanks for pointing that out. This needs to be mentioned to complete the picture. However I don't think it make sense to put after tax money into a traditional IRA when those same dollars could be put in a Roth instead. "

Agreed, but for those of us with too much income to be eligible for a
Roth and the expectation of paying a lower tax rate in retirement, we do contribute after tax money to a traditional IRA--and must keep track of the basis.

Best wishes, Chris
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However I don't think it make sense to put after tax money into a traditional IRA when those same dollars could be put in a Roth instead.

Not "when" but "if"! If your modified AGI is too high, you cannot contribute to a Roth IRA. And if you participate in a qualified plan and your income is too high for a Roth, you cannot deduct contributions to a Traditional IRA.

While I agree that it would be better to contribute to a Roth IRA or make deductible contributions to a Traditional IRA than to make non-deductible contributions to a Traditional IRA, not everyone with earned income has that luxury, and it is misleading to write as if they could.
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You make three years of non-deductible contributions in your thirties, then you wait thirty more years and take RMD but you will be forced to account for the non-deductible contrib.

Can you remember that? Can your bene remember that?


Remembering will not be a problem because the IRS requires you to submit some extra forms every year which show the split. The problem is that you may not want 30 years of extra tax forms.
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I wrote: You make three years of non-deductible contributions in your thirties, then you wait thirty more years and take RMD but you will be forced to account for the non-deductible contrib.

Can you remember that? Can your bene remember that?


Rijet replied: Remembering will not be a problem because the IRS requires you to submit some extra forms every year which show the split. The problem is that you may not want 30 years of extra tax forms.

My point exactly. So just invest after tax and deal with it.


buzman
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So if i open a Roth, i can contribute,buy and sell as much as i want and not worry about taxes and i wont have to keep track of my cost basis on each stock i buy over the life of my ira??
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La7676, that is true in both Roth and traditional IRAs.
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