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Taxes on withdrawals
Old 04-29-2007, 08:32 AM   #1
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Taxes on withdrawals

Can anyone tell me what the tax rates are on these different withdrawal catagories?

1) 457k (should be the same as a 401k). Are these withdrawals taxed as ordinary income? Or are there short term and long term capital gains that need to be accounted for and taxed differently? I assume that all the withdrawals would be long term anyway since this account has been alive for many many years. Will I need to know that my tax basis is on the shares (mutual funds) that Im selling as I withdraw?

2) Pension...Ordinary income tax rates?

3) Roth IRA...I actually know this one so nevermind

4) Taxable accounts....what are the tax rates now for long term and short term gains?
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Re: Taxes on withdrawals
Old 04-29-2007, 09:05 AM   #2
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Re: Taxes on withdrawals

1) Withdrawal from 401k/IRA: As far as I know, it's taxed as ordinary income. Except that you don't pay SS or Medicare taxes. No capital gains, short or long, to worry about.

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Re: Taxes on withdrawals
Old 04-29-2007, 09:55 AM   #3
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Re: Taxes on withdrawals

Tax rates will depend on your income amount and your filing status. May I suggest you get out your copy of TurboTax and run scenarios?

Tax rates run from negative % (IRS pays you!) to 35% with 0% being the largest tax bracket. Something like 40% of households pay no income tax, so many people are in the 0% tax bracket.
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Re: Taxes on withdrawals
Old 04-29-2007, 10:23 AM   #4
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Re: Taxes on withdrawals

In a 401K it can happen that capital gains on assets in the plan are taxed at CG rates and not as ordinary income. This is the case when the assets are company stock contributions and the 401K is rolled over or lump sum withdrawn and the stock is withdrawn as a lump sum. Google Net Unrealized Appreciation (NUA) for an explanation. Aren't 457K's granted by government entities (such as cities) and as such do not have company stock? Never lump the different tax deferral plans together and assume the rules are the same.

Long term capital gains rates in taxable accounts depend on tax bracket and are currently run 5% and 15% as well as 25% and 28% on some specialized assets. It is widely expected that these Bush tax cut rates will expire in the next administration and could revert to the old higher rates or to some other rate structure.
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Re: Taxes on withdrawals
Old 04-29-2007, 11:09 AM   #5
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Re: Taxes on withdrawals

I actually did try to use TurboTax to figure this out, but when it started asking if I had pension withdrawals or IRA withdrawals and such, I was stuck. It started asking for me to enter the amounts from each block on certain forms that I had never heard of since I dont really have any withdrawals yet and dont get these forms.

457k is basically the same as a 401k but for government employees. It also has much more relaxed withdrawal options. Upon leaving employment at any age, I can withdraw at will with no penalties. So, I guess the 457k will be taxed as standard income tax rates (whatever they are depending on my tax bracket at that time).

Are you saying that long term capital gains tax rates are 15% right nor, but might go back to previous levels if / when the Bush tax cuts expire? What was the previous rate for LTCG?
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Re: Taxes on withdrawals
Old 04-29-2007, 11:41 AM   #6
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Re: Taxes on withdrawals

Quote:
Originally Posted by utrecht
Are you saying that long term capital gains tax rates are 15% right nor, but might go back to previous levels if / when the Bush tax cuts expire? What was the previous rate for LTCG?
LTCG are scheduled to be taxed at a max of 15% through 2010, when the Bush tax cuts expire. LTCG that fall into the lowest two brackets (10% and 15%) are taxed at 5% in 2007 and 0% in 2008-2010. Through 2010, qualified corporate dividends are taxed the same way as LTCG. After 2010, LTCG and dividends revert to their pre-2003 rates - LTCG at a max of 20% (10% in the two lowest brackets) and dividends revert to being taxed as ordinary income.
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Re: Taxes on withdrawals
Old 04-29-2007, 03:37 PM   #7
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Re: Taxes on withdrawals

Quote:
Originally Posted by utrecht
2) Pension...Ordinary income tax rates?
I have been told that pensions are federally taxed as ordinary income and dependent on where you live for state taxes. Illinois = 0
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Re: Taxes on withdrawals
Old 04-30-2007, 11:07 AM   #8
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Re: Taxes on withdrawals

I've read sme things on other boards which comment on this exact question.

IRA RMD taken in 15% tax bracket. Based on exemptions, taxes actually paid are in 5-10% range.
Taxable accounts are drawn down, with taxes paid. Because 15% tax bracket is being used LTCG are taxed at 5%. Even if the LTCG income and dividend income provide enough to push person to 28% or 33% tax bracket "based on if this was income"...

So if a person needs a large income in retirement, keeping RMD low (to keep tax bracket low) and using Roths and Taxable accounts is a better strategy than having significant assets in an account with an RMD.

After I run Turbo tax on this, I'll let you know.
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