When one withdraws funds from IRA's,401k's,and Keogh plans,is it taxed at ordinary income tax rates,all the way on up to the 35% tax rate?If so,what's the point of these vehicles if one can just buy some stocks and hold for the long term(over 1 year) and get a maximum of 15% long term capital gains tax rate?
Note that they are RETIREMENT, money saved for the future. Off the top of my head, I think the Roth IRA is not taxed when the money is taken out.
yes they are taxed as ordinary income. the point is you get to contribute pretax money and in the case of 401k the company sometimes gives the employee a free match. in theory when you retire your tax rate could be lower because you wont be working then. overall the roth ira is the best way to go because there is no tax when you retire.
· The tax law signed by President Bush generally strengthens the case for millions of investors to buy and hold stocks in their regular accounts, while favoring bonds in their 401(k)s and other tax-advantaged retirement plans. · Under the new tax law, there is a top tax rate of just 15% on stock dividends and on long-term capital gains. That's less than half the maximum tax rate, 35%, on ordinary income, which includes interest payments from bonds. Thus, most investors will get the biggest tax savings by putting bonds in their tax-advantaged accounts. · The new tax law means that investors should favor high-quality and high-yield taxable bonds, real-estate investment trusts and short-term stock holdings in their retirement accounts. For taxable accounts, investors should look to stock index funds, tax-managed funds and long-term stock holdings. · Keep in mind one possible hitch: These changes on dividends and capital gains are scheduled to run through the end of 2008. Nobody knows what will happen after that, although Republican leaders in Congress are expected to try to make these and other changes in the new law permanent. · Here's one model for allocating funds to take advantage of the recent changes. Suppose you have a $300,000 portfolio, with $150,000 in a taxable account and $150,000 in retirement accounts. Let's say your goal is to own 70% stocks and 30% bonds, which means you want $210,000 in stocks and $90,000 in bonds. The smart move is to use the retirement account to buy $90,000 in taxable bonds. With a 401(k) or traditional IRA, you will eventually pay income taxes on your withdrawals. However, the tax bill is put off until retirement, thus allowing tax-deferred growth. Next, turn to your stock-market money. Your goal is to purchase $210,000 in stocks and stock funds. But after buying the bonds, you have just $60,000 left in your retirement account. The objective: Use the retirement account to buy the stocks that will generate the biggest tax bills, while pursuing more tax-efficient stock-market strategies in your taxable account.
The compound interest you receive is an important component of retirement plans - say you're 30 years away from retirement in a 10% interest bearing investment - I'm not going to do the math (too late) but you'd be looking at an impressive % increase upon retirement more than offsetting difference between long term rates and ordinary income.
Roth IRA's allow investors who do not exceed a specific income levels to contribute a limited amount of money toward retirement annually. Unlike the traditional IRA, the contributions are not tax deductible. However, Roth IRA account holders are not taxed when they begin withdrawing money at or before retirement (subject to certain rules and regulations). Another difference between the two is that Traditional IRAs require holders to withdrawal money at 70 1/2 (but can begin taking money as early as 59 1/2). Roths have no such mandatory withdrawal age.
It worse than you note. It is a triple situation. On the other hand you can zero out all these impacts in several ways.
Funds in an IRA may be invested in a broad variety of vehicles such as stocks, mutual funds, and bonds. Because an IRA must be administered by some trustee, most people are limited to the investment choices offered by that trustee. Certain investments are not allowed in an IRA, however; for example, options trading is restricted and you cannot go short.