Q:

How are IRA contributions and withdrawals taxed?

A:

Quick Answer

The way IRA contributions and withdrawals are taxed depends on the type of IRA, according to Investopedia. For a Roth IRA, withdrawals are not taxed, and for a traditional IRA, pretax contributions and all earnings are taxed as regular income at the time of withdrawal.

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Full Answer

Contributions for a traditional IRA may be fully or partially tax deductible based on modified adjusted gross income, according to Investopedia.com. For 2014, an individual with a MAGI up to $70,000 is eligible for at least partial deductibility, and there are no income limits on who can contribute to a traditional IRA. Contributions for a Roth IRA are not tax deductible, as withdrawals are not taxed.

Only individuals with a MAGI of $112,000 or less can maximize the annual contribution limit of $5,500 for 2014 for a Roth IRA. Only individuals with a MAGI of $127,000 or less can contribute a partial amount to a Roth IRA, with the remainder going to a traditional IRA. For a Roth IRA, in order for withdrawals to be tax-free, the account has to have been open for at least five years, the funds are used for a qualified home purchase, or the account holder is 59 1/2 or older, states Investopedia. With a traditional IRA where taxes are assessed at the time of withdrawal, no additional penalties apply as long as the account holder is 59 1/2 or older, or the funds are used for a qualified purpose.

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