A Friday letter writer suggested that if there was a 30 percent capital gains tax rate, all taxpayers would be alarmed at paying the 30 percent rate on distributions from their 401(k) plans that were generated from capital gains instead of their presumed normal tax rate of 15 percent.
The writer’s statement alarmed me. I am no expert, so I do check information from biased sources, but in reading the instructions and preparing over 50 of my own tax returns I believe all the distributions from my 401(k) will be taxed at my normal rate regardless of what character (capital gain, dividend, ordinary income, etc.) it had in the plan. Therefore, some might not be taxed at all, some at 10 percent, some at 15 percent and so on, depending on my taxable income and what bracket I rise to in the year of distribution.
As far as capital gains a person earns outside of the 401(k), the tax rates usually discussed are maximums and apply to people making large enough incomes to fall into tax brackets that exceed that rate. The tax rate could actually be less. This means if you had such a high income that you were in a high tax bracket such as 35 percent, the maximum rate as suggested above applied to your capital gains would only be 30 percent. If your income was much less and you were only in the 15 percent bracket for your total income, the tax on the capital gain would also only be 15 percent. If I am wrong, please correct me. I would not want to spread misinformation.
Bill Severson
Stanwood
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