Dividends, capital gains, interest, in retirement plans

I have questions about the tax implications of gains or losses in retirement accounts.

Suppose an investor has a qualified retirement plan of whatever type (SEP, 401k, Pension, Money Purchase, etc.), and he invests the money in different investments that provide some combination of the following returns:

Dividends Capital gains Interest

and also in today's climate:

Capital losses

Now, here are the questions. They look hard to me, but I'm hoping there are easy to use answers:

When the investor distributes income back to himself from the plan, he's supposed to pay taxes on the income. How does he figure those taxes?

Is each component of the investment income taxed at whatever rate he would pay if the income did not come from a retirement plan? Or is it all ordinary income?

If distributions are not just ordinary income, are they taxed at the then current rate at the time of the distribution, or at the rate when the income was earned?

For example, if some dividends were earned when there was no special rate for dividends, and some after there was, is the income taxed at two different rates? This gets pretty messy when you try to trace the components of income at that fine a level.

If there was a capital loss, is that treated as an ordinary long term loss, set against long term gain?

If anyone can point me to an IRS publication, a web page, or a book that explains all of this, I'd be grateful. I suspect others might also wonder about these questions.

Thanks.

Alan

[...]

By including the distributions on lines 15/16 of Form 1040. There may be additional excise taxes (penalties) if various rules related to retirement age and so one are not met.

BTW, you are usually not distributing just "income" back to yourself, but rather a portion of the entire balance in the account, regardless of how much was contributed vs. how much was a gain/loss on the investment.

All ordinary income.

You are taxed at your ordinary income rate when you take the money out, which avoids all the complexities you mention.

This is the whole point of regular IRA or 401k -- you avoid paying higher marginal tax rates on the income (earnings plus portfolio) during your peak earning years, instead paying the presumably lower marginal tax rates you are subject to in retirement. If this is *not* going to be your situation, then these types of accounts are much less attractive from a financial planning standpoint, almost to the point of, "why bother?"

This is also, why, for example it makes little sense to invest in tax-exempt bonds inside a retirement account, you are essentially wasting the tax-advantaged status of this type of investment.

If you want to take advantage of special capital gains tax rates and capital loss deductions, keep your investments outside of a retirement account.

No. A tax-deductible loss requires first that you have a "basis" (an amount you have already paid tax on, roughly speaking). You never paid tax on any of the money going into, or earned within, the account, so you have no basis against which to calculate a loss (I'm leaving out all the various rules and exceptions regarding non-deductible contributions, etc).

IRS Pub 590 and Pub 525 might be good places to start. But I think once you "get" the concept that the retirement plan (normally) contains 100% pre-tax money, it's pretty clear that it's all taxable on the way out.

-Mark Bole