A shocking discovery about capital gains, IRA distributions

DEAR HARRY: This is the first year I'm compelled to take a minimum amount out of my IRA. I started this IRA with a rollover from an employer's pension plan, it seems like a zillion years ago. The original amounts consisted of stock mutual funds including a small amount in a money-market fund. I continued adding to it over the years, including another employer-plan rollover when I retired a few years ago. I was always under the impression that any capital gains inside the IRA would also come to me as capital gains when the funds were distributed. I was almost knocked off my feet when my accountant told me otherwise last week. I did a little research and found out that he was right. This is terrible news for us retirees. First, Uncle Sam gives us the break with the IRA deduction, then we give it back in spades because IRA capital gains are treated as ordinary income when distributions are made. Is this fair?

WHAT HARRY SAYS: The law does not have to be fair, but it would be nice if it were. When investing, it's always good to be diversified. It's even better if you can invest in stocks outside the IRA, and fixed-income securities within the IRA. This way, the capital gains on the stocks are taxed at a favorable rate. The difference can be substantial. Consider $100,000 of gains earned on stocks (or stock mutual funds). If your normal tax bracket is 28 percent, you will have paid Uncle Sam 13 percent less in taxes on your gains when you take your distributions. To get rid of that difference in treatment requires a change in the law. Lean on your senators and representatives! 

Email Harry Gross at harrygrossDN@gmail.com, or write to him at Daily News, 801 Market St., Philadelphia, PA 19107. Harry urges all his readers to give blood. Contact the American Red Cross at 1-800-Red Cross.

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