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Hi -

I have a couple questions. A few notes. I have 25-30 year time horizon before needing these funds. They are in a Rollover IRA (so consist of pre-tax dollar contributions) and strictly for retirement.

1) When buying stocks in a tax-deferred IRA, do short-term and long-term capital gains still come into play? Do I need to keep track of all stocks within this IRA that I hold for shorter than 12 months for the next 25-30 years? Or is it that when I get to retirement and start taking distributions that all of the money, contributions and gains, is just taxed at my then current income tax rate?

2) I don't understand the rationale behind the strategy for trading stocks in taxable brokerage accounts vs an IRA. With a 25-30 year time horizon until retirement why does it matter? If the money you have is in an IRA and you want the greatest chance for growth shouldn't you be in stocks??
If the money is for retirement what would be the advantage to using a regular brokerage account? Then you'd have to mess with potentially paying taxes every year. Is it because the answer to #1 is yes, everything gets taxed at my then current income rate, whereas if I had used a regular brokerage account I would theoretically be paying a lower rate of tax on the gains each time I sold?

Sorry for being longwinded. Just trying to fine tune my understanding on some of what I have been reading.

Thanks!
Michael
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frogdog30: "Hi"

Hello.

"I have a couple questions. A few notes. I have 25-30 year time horizon before needing these funds. They are in a Rollover IRA (so consist of pre-tax dollar contributions) and strictly for retirement.

1) When buying stocks in a tax-deferred IRA, do short-term and long-term capital gains still come into play?"


Not under the current rules.

"Do I need to keep track of all stocks within this IRA that I hold for shorter than 12 months for the next 25-30 years?"

Not under the current rules; you might, for your purposes and knowing your investment style, still want to track this issue.

"Or is it that when I get to retirement and start taking distributions that all of the money, contributions and gains, is just taxed at my then current income tax rate?"

Yes, under the current rules. Also there will eventually be RMDs under the current rules.

"2) I don't understand the rationale behind the strategy for trading stocks in taxable brokerage accounts vs an IRA. With a 25-30 year time horizon until retirement why does it matter?"

Timing of taxes, changes in tax rates, and difference tax rates between ordinary income and LT capital gains.

"If the money you have is in an IRA and you want the greatest chance for growth shouldn't you be in stocks??"

Assuming that you mean the "most" growth, generally speaking, yes.

"If the money is for retirement what would be the advantage to using a regular brokerage account?"

See above.

"Then you'd have to mess with potentially paying taxes every year. Is it because the answer to #1 is yes, everything gets taxed at my then current income rate, whereas if I had used a regular brokerage account I would theoretically be paying a lower rate of tax on the gains each time I sold?"

Yes. Also, who knows what future tax rates will be.

Hope this helps.

Regards, JAFO
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I don't understand the rationale behind the strategy for trading stocks in taxable brokerage accounts vs an IRA. With a 25-30 year time horizon until retirement why does it matter? If the money you have is in an IRA and you want the greatest chance for growth shouldn't you be in stocks??

You're mixing a couple of issues here. Let's first look at allocation, IOW, how you spread your investment dollars. Even in stocks there are a number of subcategories which you might want to consider for diversification. As you get closer to retirement you'll also want to think about reducing your risk (and potential for gain) as preservation of capital becomes more important. Taxable vs retirement account isn't part of this decision.

As you have more cash to invest for retirement you'll hopefully have more to invest than the annual limits for retirement accounts, so you'll want to choose the most tax-effecient places for the investments called for my you then current allocation. Under current tax law long-term cap gains and qualified dividends are taxed at a lower rate than ordinary income. LTCG's aren't taxed until you sell (except for mutual fund distributions). Some investments, e.g., bonds and REIT's, give off a lot of ordinary income. When you have a choice of where to put an investment, keep those that give off ordinary income and short-term trading in retirement accounts and use taxable accounts for stocks you plan to hold for the long haul.

Phil
Rule Your Retirement Home Fool
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Thanks for the quick replies! So the takeaway I get for q#2 is it doesn't matter until you have more to invest than can be contributed to an IRA. Right now I'll be extremely happy if I can get halfway towards the limit for a yearly contribution. But maybe one day in the future I will have to think about this.

When/if I ever get there then I now see how the strategy makes sense to optimize your tax situation.

Thanks!
Michael
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