27 Jan How are gains in an IRA taxed when you take money out?

Q. When the money comes out of the IRA, how are the gains taxed?
— Retiree

A. An IRA is a great way to save for retirement, but yes, if it’s a traditional IRA, you will owe taxes when you take money out.

The distributions are taxed as ordinary income.

This includes all earnings from dividends, interest, and capital gains, said Gail Rosen, a Martinsville-based certified public accountant.

“The IRS does not allow you to allocate a lower tax rate to the IRA earnings that would qualify for long-term tax rates under non-IRA rules,” she said.

To lower your tax on the distributions, Rosen suggests you check if your IRA account includes any nondeductible contributions you made over the years.

“If you made any after-tax IRA contributions, then a portion of any withdrawal will be tax-free,” she said. “ The tax-free amount is based on the ratio of nondeductible contributions to the total balance of all your traditional IRAs.”

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This story was originally published on Jan. 27, 2022.

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