In time-deferred pre-tax funds, such as 401K and IRAs, I understand that the contributions and capital gains tax is not paid until after they are released. In this case upon retirement/a certain age of the contributor.

Treasury Bonds do not incur any capital gains tax, but gain interest at 4% currently. The contributions were pre-tax dollars. How would this time-deferred fund be taxed upon dissolution?

If I understand correctly, only the initial income tax would be levied upon the old contributions and NOT on the final value of the entire fund

2 Answers 2


Withdrawals from 401k and (non-Roth) IRA accounts, assuming all contributions were pre-tax as is probably typical, are taxed as ordinary income. This includes money from all sources: contributions, interest, capital gains, etc. This means that Treasury bonds have no tax advantage over any other investment when they are held within a 401k or IRA. Since Treasury bonds pay lower interest rates than other bonds and in these accounts are taxed the same way, they are usually considered inappropriate for 401k's and IRA (for other than "safety" concerns).


If your contributions are made pre-tax, then the entirety of your withdrawals are taxed, plus penalties if you withdraw early. Whether the earnings are interest or capital gains doesn't matter.

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