Which of these statements concerning traditional IRAs is correct
a) Earnings are not tax deductible
b) Earnings are taxable when withdrawn
c) Contributions are never tax-deductible
d) Contributions are always made by the employer
The Correct Answer Is:
- b) Earnings are taxable when withdrawn
Traditional Individual Retirement Accounts (IRAs) allow individuals to defer taxes on income earned in the account until it is withdrawn. This can significantly reduce an individual’s tax burden when withdrawing funds from their account. However, there are a few caveats to note with this strategy. First, earnings in an IRA are taxable when withdrawn regardless of whether the individual is using the money for retirement savings or other purposes. Second, if an individual has less than $1,000 in their IRA at the time of withdrawal, all of their earnings will be subject to taxation regardless of whether they have used the money for retirement savings or not.