WHEN ARE DISTRIBUTIONS TAXED?
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It is important to remember that your traditional IRA consists of
both the contributions you have made over the years and the earnings on your
contributions. The earnings include reinvested interest and dividends that have
accrued over the years on the contributions you have made, as well as the
appreciation of your investment. When you make a withdrawal from your IRA, it
may include portions of your original contributions.
Distributions from deductible IRAs are fully
taxable, while distributions from non-deductible IRAs are
partially taxable. That part of a distribution attributable to non-deductible
contributions (after-tax dollars) is not taxed: taxes were already paid.
Here is the breakdown of what is taxable upon withdrawal in an
earnings are taxable.
? All tax-deductible contributions are taxable.
When you take distributions, you must separate nondeductible
contributions from earnings, and nondeductible contributions from tax-deductible
contributions. The IRS has formulas that can separate these amounts.
Of course, distributions that are taken before age 59? will be
hit with a 10 percent penalty unless they meet the special exceptions in the tax
Now, some closing words on IRA