Long-Term Capital Gain vs. Ordinary Income

What is it

• Long-Term Capital Gains: Profit from selling investments held more than 1 year
• Ordinary Income: Wages, interest, pensions, and Traditional IRA/401(k) withdrawals
• Long-term capital gains generally receive preferential tax rates
  

How it works

• Long-term capital gains are taxed at 0%, 15%, or 20%
• Ordinary income (ie: IRA withdrawals) is taxed at 10%–37%
• Both increase taxable income when calculating total tax
  

Why it matters

• The type of income can significantly impact total taxes owed
• Higher income may affect Medicare premiums (IRMAA)
• Coordinating withdrawals and investment sales can improve tax efficiency
  

Example

Assume a married couple shows $120,000 income.

Scenario 1

• $120,000 of long-term capital gains
• Federal tax: $0

(Falls within the 0% long-term capital gains bracket)

Scenario 2

• $120,000 of Traditional IRA distributions
• Federal tax: $10,040

(Taxed at ordinary income rates after the standard deduction)