16 Aug How are taxes calculated on IRA withdrawals?

Q. If I want to make an IRA withdrawal with funds that were deposited in my IRA pre-tax, will I be taxed on both the profit that I made on securities sold to fund the withdrawal or only on the funds that I withdraw? How does it work?
— Retired

A. It’s smart to understand your tax liability before you withdraw funds from a retirement account.

No one wants any ugly surprises.

You are only taxed on the withdrawal, said Michael Karu, a certified public accountant with Levine, Jacobs & Co. in Livingston.

He said it does not matter how much is earned within the IRA, and he offered this example.

Let’s say you bought a stock in your IRA for $10 per share and sold it for $100 per share. The $90 profit is not taxable as long as you don’t withdraw it. However, since you received a tax deduction for the amounts deposited, every dollar withdrawn is taxable, Karu said.

“Additionally, there are age restrictions on withdrawals, which may cost an additional 10% tax penalty on the full amount withdrawn,” he said.

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This story was originally published on Aug. 16, 2022.

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