From what I’ve Googled, it looks like ALL withdrawals from a traditional IRA, SEP IRA, and Simple IRA are taxed as ordinary income. So even though a lot of the gains in the IRA are capital gains, which are usually taxed at a lower rate, you have to pay the higher ordinary income tax rate?
Thanks.
Correct, it is all taxed as ordinary income. What went in was pre-tax, so what comes out is taxed. It has been that way from day one of the programs.
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Thank you for your help.
I’m retired, and by far my largest asset is my traditional IRA. Any money I need beyond SS and two small pensions comes from there, and is taxed. However, so far the amount I need falls well short of where I would go beyond the 24% tax bracket. So, toward the end of the year, I calculate how much more I can withdraw without exceeding that bracket. That amount, minus taxes (federal and state!) is rolled directly into my ROTH. Like everything that has ever gone into the ROTH, it is already taxed, and as such it and any earnings from investing within the ROTH is forever tax free. For what that is worth.
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Yes. That has always been the rule. You were deferring taxes when you made contributions because you saved the ordinary income taxes on those contributions. Since the taxes saved when you made the contributions were ordinary income taxes, the taxes you pay on the withdrawals will be the same type - ordinary income taxes.
I will also note that the state of Pennsylvania does not allow you to defer state taxes on contributions, but it also doesn’t tax withdrawals. I’m not sure if other states do that, too, but I lived in PA for a while, so all the contributions I made while living there had state taxes assessed on them. That leads to the observation that the best scenario from a state tax perspective is to contribute when you are living in a state that allows you to defer state taxes on contributions, and then, when you are withdrawing, live in a state where there are no state taxes, or where retirement account withdrawals aren’t taxed (like PA).
AJ
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As an aside, I always thought it odd that all brokerage accounts seem to track unrealized gains in an IRA/Roth.
Imagine how many clients would be SCREAMING at them if they didn’t. Customers are not always rational.
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Why? Unrealized gains in an IRA are completely irrelevant - and misleading. In fact, if there was anything that would be worth tracking it would be total contributions so the act of realizing gains and thus increasing the cost basis actually creates additional complexity and confusion for no benefit.
I think you missed @RHinCT’s explanation:
Asking why someone is irrational is, in itself, irrational. 
AJ
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I clicked on the link. It was a story about a customer trying to avoid cross-contamination when purchasing ice-cream. That seems rather rational.
Yes, because of this you can do better in a well managed taxable account. If you do it right you pay taxes only when you sell and then at capital gains rates.
Of course that is after tax money. So a Roth IRA might be a better choice if you qualify.
My current thinking is to try to strike a decent balance between account types. Ideally, I’d be at a point where my RMDs from Traditional retirement accounts plus Social Security more or less cover my core costs of living, while having enough between Roth and after-tax accounts to take advantage of whatever the market, tax laws, and life offer.
I came to this way of thinking once I realized that major medical costs — the biggest “surprise” expense many retirees face — are currently generally tax deductible once they pass a certain percentage of income. (7.5% sticks in my mind, but I’m not 100% sure of that.)
I figure that there are a lot of unknowns and assumptions that go into trying to figure out the “optimal” conversion strategy. In a world like that, there’s at least some value in getting to a reasonable balance point and having some measure of flexibility.
Regards,
-Chuck
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The medical costs would have to be quite high. Most people can’t itemize deductions simply because of how high the standard deduction is. So it has to be higher than that and then also take the 7.5% (?) into account.
And most medical care would be covered by insurance.
So first, how much is NOT covered. Then is that over $30Kish? Then the 7.5%. Crazy.
Medical costs would have to be six figures to be able to deduct the costs!
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Roth IRAs have much lower contribution limits than employer plans, so you really need to suggest “Roth account” rather than “Roth IRA”. Then, it depends on where in life you are. If you are in the accumulation phase, that might be a reasonable choice. But since Roth IRAs weren’t available until 1998 and Roth accounts in employer plans weren’t available at all until 2006, and weren’t widely available until several years later** many who are close to retirement may already have a substantial portion of their retirement funds in pre-tax accounts. If that’s the case, then their option is to do Roth conversions. That’s a very individual choice that depends on a lot of specifics, including, but not limited to, the effect of the conversion ACA subsidies, IRMAA premiums, NIIT, SS taxation, etc.
AJ
**Roth accounts in employer plans were allowed beginning in 2006, but were originally supposed to sunset in 2010, along with the rest of the EGTRA provisions - why would employers set themselves up to spend money administering an account type that was supposed to go away? In 2006, they were made permanent through the Pension Protection Act, but then in 2007, the Financial Crisis began, again delaying adoption. My fairly large employer finally started offering Roth 401(k) accounts in 2013 or so. By that time, I was looking at retirement in 5 years and was in the highest tax bracket I had ever been in, so the tax savings were significant.
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Except for that pesky deductible (Mine, on ACA, is ~ $9k), co-pays and costs for prescription drugs. And then there’s long term care, which is NOT covered by medical insurance. You can buy long term care insurance, but if you didn’t buy the policy years ago, it’s generally pretty expensive and has a lot of limits on what it will cover - generally up to a specific dollar amount
I would point out that under current tax law, the standard deduction will be cut in about half beginning in 2026. I would also point out that at a fairly typical $60k - $100k/year, long term care is well over even the current standard deduction, much less the 2026 limit. I would further point out that you are quoting the MFJ standard deduction amount. Only those who start retirement filing MFJ and both die in the same year are filing MFJ for their entire retirement. So the vast majority of retirees are likely to be filing Single for at least some of their retirement.
The Single standard deduction is about half of the MFJ deduction - so under current law, in 2026 it will be closer to $7500. That’s not really a very high bar compared to how high deductibles and/or long term care costs are. And if you’re in long-term care, you probably won’t have a lot of other expenses that you have to fund, so medical costs being a very large portion of your income is quite feasible.
AJ
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Re: Standard Deductions.
Keep in mind the $10k deduction limit on mortgage interest and property tax is part of the Trump tax bill that expires end of 2025. That is what causes most of us to use standard deduction.
Already both parties have plans to renew. High property tax states–usually blue states–would like to remove the deduction limit. And the large estate tax exemption is under discussion for revision.
Isn’t only a portion of the long-term care fee deductible? I don’t recall the details, but I think the “housing” part isn’t, and the “medical” part is. Or something like that.
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If the person is in long term care primarily for medical reasons (like if they can’t perform all of the activities of daily living), then lodging/housing is fully deductible.
AJ
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And when I clicked on it, I got a story about an employee who forgot their power supply and laptop battery when going to a small location to work calling Tech Support asking about spare batteries and power supplies. The small location had only desktop computers, so there weren’t any spares for a laptop. The employee said that they had to use their laptop and couldn’t use any of the desktops, so they were annoyed. They then asked the IT support rep to call their manager and tell them why they wouldn’t be online for the next few hours, when the employee obviously had the ability to do so themself, since they were on the phone with the IT support rep. That seems rather irrational to me.
Which just proves the point that customers are not always rational.
AJ
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The site, notalwaysright.com, is a mix of many types of stories, but the predominant one, which got the site started, involves customers and their behaviors. Such as this one.