John M. Hoffman & Associates CPAs
Frequently Asked Tax Questions
Individual Retirement Accounts – IRAs
"How are distributions from "traditional" IRAs taxed?"
Not counting the return of capital when non-deductible contributions are involved, IRA distributions are taxable as ordinary income. It does not matter how the money in the IRA is invested, it comes out as ordinary income. In fact, if you invest your IRA in tax free bonds you effectively are converting tax free income into taxable income (not a good idea).
Generally distributions before age 59 and ½, are subject to a 10% federal early withdrawal penalty on top of all other taxes. For this reason alone, we suggest that you don’t make IRA contributions unless you think you can allow the money to stay in the IRA for some time.
There are exceptions to the 10% penalty for things like qualified first time home buyers (up to $10,000), taxpayers needing to pay for medical insurance or expenses, paying for college expenses, disability that exempt the early withdrawal form penalty but do not exempt the withdrawal from inclusion in taxable income. Repeating ourselves, this income is still subject to tax.
