Retirement withdrawls don't qualify for zero-tax treatment

— -- Q: Does the zero capital gains tax also apply to stocks taken out of deferred retirement accounts like a 401(k)?

A: There seems to be intense confusion over the tax rule changes that will let many taxpayers pay no capital gains tax. Yes, you read that right, some taxpayers may be able to sell winning stocks (if they have any) and not pay capital gains taxes.

Specifically, if you're married and filing jointly and report $65,100 or less in taxable income, including your capital gains, you may very well owe nothing on the capital gain.

That's not a bad deal. You can read more about it here.

That's the good news. But to answer your question, no, the zero capital gains tax rate doesn't apply to deferred tax retirement vehicles in most cases. That's because in most cases money taken out of a tax-deferred retirement account is taxed at your ordinary tax rate, not the usually-lower capital gains tax rate.

Don't be completely discouraged. There are still ample opportunities to consider retirement tax planning.

With stock values so depressed, now might be a good time to consider converting a traditional IRA to a Roth IRA. You will pay tax on the amount converted, but "the tax cost will be based on the low valuations at the time of the conversion, and no tax will be owed on future value increases," according to PriceWaterhouseCoopers' 2008 Guide to Tax and Financial Planning.

And while currently you can convert a traditional IRA to a Roth only if you have adjusted gross income of less than $100,000, that cap disappears in 2010. That will open this tax planning opportunity to all taxpayers.

So while you might not get the zero tax treatment, there are things you can do to help reduce your tax exposure in the future.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns.