Sorry to keep bothering you folks, but I'm getting confused again. The issue is traditional IRA vs. Roth IRA and considering capital gains.
I thought I had it all worked out. I thought that over the next 4 years I would transfer 25% of our assets from a 403b to a Roth IRA, pay the taxes each year (@15%) and then have a nice nest egg that we could withdraw tax-free for extraordinary expenses without bumping up our tax rate.
But then I found out that given our taxable income, the tax rate on capital gains and dividends is 0%. Almost all of the value of my retirement account is capital gains-- the value of my investments has increased 8-fold since I left the university and stopped making contributions. So when I take a distribution I only have to pay taxes on the original tax-deferred contribution (in my case, about 12% of my total assets).
So, really, I would be better off leaving everything in the traditional (tax deferred) account and letting it all grow because the tax bite won't be so bad. Please correct me if I'm wrong!
Any withdrawals from a Traditional IRA are considered REGULAR INCOME no matter whether they came from gains in your investments or not. So leaving funds in an IRA insures that any RMD's will be taxed, not as capital gains, but at regular income rates. Converting IRA assets to a Roth at 15% insures the maximum tax rate you will ever pay since Roth withdrawals are not taxed.
The IRS RMD withdrawal tables insure that by age 80 you will have to take out over 5% of your IRA as an RMD and at age 85 you will have to take a 6.7% RMD. And at age 90, if you are fortunate enough to live that long, the RMD bite is about 8.8% of your IRA. Depending on the value of your IRA, this can be quite serious since it could push one into a higher tax bracket when other income like Social Security, other taxable investments and any job income are added in. Only you can plug in your assumptions to see if and when you might go into a higher bracket. GOOD LUCK!!!! :-)))
Yep. I was wrong again. When I looked at my last year's tax return I discovered that the mutual funds we liquidated were taxed at the capital gains rate (i.e., 0%) so I thought my TIAA mutual funds would be capital gains, too. But last year's mutual funds were normal (i.e. after tax) mutual funds. For pre-tax mutual funds the whole thing is taxable. Learning continues.
Chrysalis, I absolutely hate when I have to face a new tax issue. I can almost bet that I will mess up something on it. Tax law is NOT easy. GOOD LUCK!!!! :-))))
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