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Old 12-02-2007, 09:28 PM
 
Location: Sacramento
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A capital gain is the difference between what you paid for an investment (stocks and stock mutual funds for this discussion) and what you received when you sold that investment. If you made a profit on the investment, then you have a capital gain.

Capital gains from stock or stock mutual funds which have been held at least one year receive favored tax treatment, with a maximum tax rate of 15%, regardless of income. When discussing the tax fairness issues, it is one of the tax issues brought up by those believing the wealthy do not pay enough taxes on their income.

However, with the shift to IRAs and other self funded pension plans, many folks now have substantial stock or stock mutual fund holdings in their personal retirement accounts. When this money is withdrawn, it is treated as ordinary income, with a complete loss of the capital gains tax benefit received outside of retirement accounts.

Assuming the capital gains tax stays as currently structured, is the exclusion of pension profits as capital gains fair, based upon the tax deferred status of pension savings and gains? Would it more equitable to increase the maximum capital gains tax rate, say from the existing 15% to a maximum rate of 20%, and include gains earned in retirement accounts?

Thoughts?
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Old 12-02-2007, 09:47 PM
 
Location: Santa Monica
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You're talking about the tax treatment of withdrawals after age 55 (?) from a 'traditional' IRA. The Roth IRA instrument allows fully tax-free withdrawals during one's retirement age, subject to certain qualifications.

Also, the assumption is that a person's IRA withdrawls occur to supplement one's Social Security benefits, which combined personal income might be subject to one of lower/lowest tax brackets anyway.
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Old 12-02-2007, 09:52 PM
 
Location: Sacramento
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Yes, this excludes a Roth IRA. At the lower brackets, capital gains receive favored treatment too, such as a 5% tax rate for gains when folks are in the 15% tax bracket.
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Old 12-02-2007, 10:22 PM
 
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Yeah, I think that would be much more fair. As most of the middle-class America has more 401k and IRA then capital gains on stocks/bonds which are really essentially the same thing. I think they should be lumped together with gains tax. Problem is, if we lump them together, then we lose some tax money and corrupted politicians don't like you taking money away from them. I would fire the whole lot of them. 15% capital gains tax really only helps the super wealthy and I think the "loophole" should be sealed. How to seal it... i don't know...
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Old 12-02-2007, 10:46 PM
 
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Most (if not all) of the money that most people put into IRA's and 401-k's has never been taxed. None of the accumulations within those accounts -- whether from interest, dividends, or capital gains -- has ever been taxed. In theory, people draw on these accounts post-retirement, when they are in lower tax brackets. Only then do they pay any tax at all, and the fact that they do so at rates applying to ordinary income hardly seems to me like much of a price to pay for the right to forty years or whatever of tax-free deposits and subsequent compounding.
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Old 12-02-2007, 10:49 PM
 
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Unless you are really close to retirement, I don't think it's really going to matter.

When I signed up for our companies' 401K plan, a 74-year-old co-worker was in the meeting. He questioned if he could join the 401K plan too. (They told him he could.) Everyone was commenting on how great it was that it deferred taxes and he brought up this salient point: They never tell you this, but taxes always go up. Sometimes you are better off paying the taxes now rather than deferring them. Chances are, by the time the baby boomers start cashing in those 401K's and IRAs, the taxes are going to be higher than they are now.

You may want to switch over to a Roth IRA if you get the opportunity to do so.

P.S. The reason why tax-deferred plans (like the 401K's and IRA's) won't be treated as capital gains is because you never paid income taxes on the original amount. Monies in capital investments usually are accummulated from money that you have already paid income taxes on. Does that make sense?

Last edited by UB50; 12-02-2007 at 10:52 PM.. Reason: Added p.s.
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Old 12-02-2007, 10:56 PM
 
Location: Sacramento
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Quote:
Originally Posted by saganista View Post
Most (if not all) of the money that most people put into IRA's and 401-k's has never been taxed. None of the accumulations within those accounts -- whether from interest, dividends, or capital gains -- has ever been taxed. In theory, people draw on these accounts post-retirement, when they are in lower tax brackets. Only then do they pay any tax at all, and the fact that they do so at rates applying to ordinary income hardly seems to me like much of a price to pay for the right to forty years or whatever of tax-free deposits and subsequent compounding.
Where we may see it differently is that to me, the deposits and subsequent compounding are tax deferred, vs tax free.

Theoretically, I can see some justification for taxing the retirement gains as ordinary income in that the income put into the retirement accounts is deducted from your working incremental tax bracket, which normally should be higher than your retirement tax bracket. But when you look at the retirement account distribution formulas, those who are successful savers into retirement accounts may be surprised at their tax brackets in retirement.
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Old 12-02-2007, 11:00 PM
 
Location: Sacramento
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Quote:
Originally Posted by UB50 View Post
P.S. The reason why tax-deferred plans (like the 401K's and IRA's) won't be treated as capital gains is because you never paid income taxes on the original amount. Monies in capital investments usually are accummulated from money that you have already paid income taxes on. Does that make sense?
Certainly, but with the investment programs out today it is easy to separate out the money placed into the account, which should be taxed as ordinary income, and gains derived from stock and stock mutual fund investments. Outside of this class of saving (non Roth retirement accounts) this gain would be taxed at the favorable capital gain rates.
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Old 12-03-2007, 01:37 AM
 
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No doubt the technology exists to isolate what were untaxed capital gains realized into IRA and 401-k balances, but for the average person, would the increased administrative charges leave any amount to be realized from the difference between 15% and a post-retirement marginal rate on ordinary income as a significant thing? Otherwise, I don't tend to be too impressed with the idea that the fact that I was given one tax break already means that I should now be given another one.

Tax-deferred versus tax-free is just time scale. I don't think that difference alters the point. As for down the road, if I am surprised at how high a tax bracket I am in during retirement, I will think that I have done a very good job indeed. I really didn't expect to be in the tax bracket that I am now, but I don't see that as unduly restraining the enjoyment I can get out of my current and rather comfortable after-tax income...

Last edited by saganista; 12-03-2007 at 01:48 AM..
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Old 12-03-2007, 07:22 AM
 
Location: Maple Valley, WA
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Above a certain income, contributions to a traditional IRA are not tax-deductiable - on top of that, those contributions are made with post-tax dollars. Then you pay taxes again when you withdraw during retirement.

If you make above a certain income, you can't contribute to a Roth - period.

On top of that, the government dictates how much you can contribute to these accounts yearly.

If there weren't so many restrictions on these vehicles, I might agree that it would be fair - but remember, that capital gains tax would also apply to people that save very little - but at least save something - and need every penny at retirement.
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