Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Taxing IRA Investments

Posted by taxguru on August 25, 2007

Q:

Hi Kerry,

 

Can sold IRA asset profits be treated as long term capital gains for tax accounting if they are kept over the required time?(6months?)

 

I have sold quite a bit this year and would appreciate your advice.

 

Thanks….

 

A:

This is an issue that catches a lot people by surprise.  While sales of assets held for more than 12 months in your individual or living trust’s name qualify for the special lower long term capital gains tax rates, that is not the case for gains made by investments inside IRA and other retirement accounts.

Conventional IRAs, where you claim a deduction for contributions made to the accounts, are tax deferred arrangements.  When money is drawn out, and not rolled over into another retirement account, it is all subject to income tax as ordinary income regardless of how the money was invested inside the retirement account.  Income generated from bonds or other interest bearing investments is taxed the same way as profits made from stock trades.  So, keeping track of long term capital gains earned inside IRAs is not required for anything.

The other main kind of IRA, the non-deductible Roth, has the advantage of allowing completely tax free income from all of its investments, as long as the account has been held for at least five years.  Just like with conventional IRAs, there is no need to keep track of what kinds of earnings were generated inside the IRA because they all receive the same tax treatment.

As you may have read on my blog on several occasions, I am still very skeptical of the long term tax free status of Roth IRAs.  It is still my prediction that our rulers in DC will pull the same Switcheroo on Roths as they did with Social Security benefits, and force those they consider to be evil rich to pay tax on income receive from them.  FYI: Evil rich for SS recipients is any single person earning over $25,000 or married couple earning over $32,000 per year. 

I hope this answers your question.

Kerry

 

 

Netflix, Inc.

 

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