Dear XXXXX,
The tax rate applies to capital gain income was not recently changed.
The tax rate on long-term gains was reduced in 2003 to 15% (or 5% for those in the lowest income tax brackets)
The Tax Increase Prevention and Reconciliation Act of 2006 extended these rates through 2010. The tax rate on long-term gains is expected to be 20% from 2011.
In 2008, 2009, and 2010, the tax rate on long term capital gains is 0% for those in the lowest income tax brackets.
However - the distribution from 401k account is not considered a capital gain - and will be taxed at your regular tax rate regardless how long you keep your investments in this account.
As you are over 60 - there is no early distribution penalty - but the distribution will be added to your taxable income and will be taxed based on your total income, filing status, deductions, etc.
It is very important to plan your distribution wisely and avoid large distribution in one year because that might push you into higher tax bracket.
The distribution will be also a subject of state tax.
Let me know if you need any help to estimate your tax liability from distribution.
So, based on your answer, it is better for me to sell my stocks which would have long term capital gains instead of utilizing 401 which is taxed at ordinary tax rate?
I expect $60K in pension, get the max SS and need additional $150K to pay down my mortgage. What do you think my tax liability will be for 2009? I am 60 years old.
Anything else I can possibly do to reduce my mortgage? Can I qualify for loan modification if I am upside down?
there is better way - each way has its own advantages and disadvantages.
We need also to consider immediate impact on your taxes and future impact.
If you sell stocks - your capital gain will be taxed at the reduces tax rate. Also only capital gain will be taxes - not the total proceeds.
If you purchased a share at $80 and sell at $100 - you will have $100 to pay the mortgage, but only $100-$80=$20 will be your taxable capital gain.
If you take a $100 distribution from 401k plan - the total amount generally will be taxable.
So from tax prospective - if you sell shares - your tax liability will be less.
From the other hand - we need to compare your earnings from stocks and in 401k plan - and compare with interest rate on your mortgage.
If your earnings are more than your mortgage interest - you might want to postpone the distribution.
If however - your mortgage interest if higher than expected earnings - you might better to pay off the mortgage.
Another issue to consider. Either selling shares of taking a distribution will add additional taxable income - and your adjusted gross income (AGI) will be higher.
Some deductions and credits depend on AGI - and might be affected - we need to verify which deductions and credits you are using and verify that you would not loose any benefits.
As you taxable income will be higher - it might push you into higher tax bracket - so we need to plan selling stocks and/or distribution wisely - to avoid higher tax rate.
One more item.
You likely will receive social security benefits in some time.
Social security benefits might be partly taxable if your other taxable income plus half of SS benefits is above $25,000 (for singles) - so if you plan additional income from selling stocks or distribution from 401k plan - you might want to do that before you start receive SS benefits.
You may create self-directed IRA and move your assets into it. However you may not invest into the property that you are using as your personal residence - that is a prohibited transaction. You may invest only into investment or business property - for instance into a rental property.
Let me know if you need any help.
Tax Preparer
Taxes, Immigration, Labor Relations