Is a Traditional IRA Taxable?
A traditional IRA provides certain tax benefits to account holders who are saving for retirement. However, the money must remain in the account until you turn 59 1/2 or you will be hit with a 10 percent penalty on top of the taxes you will owe on the withdrawal.
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Contributions
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Contributions to an IRA are tax-deductible which decreases your taxable income in the year of the contribution. The deduction is an above-the-line deduction so you can take it in addition to the standard deduction.
Earnings in the Account
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As long as the money remains in the traditional IRA, any earnings accumulate tax-free.
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Withdrawals
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When you withdraw money from a traditional IRA, you must include the amount of the withdrawal as taxable income. For example, if you withdrew $10,000, your taxable income would go up by $10,000.
Benefits
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Traditional IRAs are best for people who expect to pay a higher tax rate in the years that they make their contributions than in the years they make their withdrawals.
Alternatives
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If you expect to be in a higher tax bracket at retirement, you should consider contributing to a Roth IRA, because even though the contributions are not tax-deductible, the withdrawals at retirement are tax-free.
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