When Must Taxes Be Paid on IRA and Employer-Sponsored Retirement Funds?

Traditional IRAs and most employer-sponsored retirement plans are tax-deferred accounts, which means they are typically funded with pre-tax or tax-deductible dollars. As a result, taxes are not payable until funds are withdrawn, generally in retirement.

Withdrawals from tax-deferred accounts are subject to income tax at your current tax rate. In addition, withdrawals taken prior to age 59½ are subject to a 10% federal income tax penalty.

If you made nondeductible contributions to a traditional IRA, you have what is called a “cost basis” in the IRA. Your cost basis is the total of the nondeductible contributions to the IRA minus any previous withdrawals or distributions of nondeductible contributions. The recovery of this basis is not seen as taxable income.

Exceptions are the Roth IRA and the Roth 401(k) and Roth 403(b). Roth accounts are funded with after-tax dollars; thus qualified distributions (after age 59½ and the five-year holding requirement has been met) are free of federal income tax.

Traditional IRAs, most employer-sponsored retirement plans, and Roth 401(k) and 403(b) plans are subject to annual required minimum distributions (RMDs) that must begin after the account owner reaches age 70½ (no later than April 1 of the year after the year in which the owner reaches age 70½). Failure to take RMDs triggers a 50% federal income tax penalty on the amount that should have been withdrawn. Roth IRA owners never have to take RMDs; however, Roth IRA beneficiaries do have to take RMDs.

When you begin taking distributions from your retirement accounts, make sure to note any required beginning dates and the appropriate distribution amount in order to avoid unnecessary penalties.

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2012 Emerald Connect, Inc.
Antolino & Associates
3240 W. Henderson Rd, Suite A • Columbus, OH • 43220
Phone: 614-442-3355 • Fax: 614-442-3371

Email Us
Like us on Facebook!



Purchase Ralph Antolino, Jr.'s Book. Bon Voyage: The Nine Secrets of the Ultra-Happy



 

 

Securities offered through Registered Representatives of NFP Securities, Inc. (NFPSI), Member FINRA/SIPC. Investment Advisory Services offered through Investment Advisor Representatives of AA Financial Advisors, LLC. Antolino & Associates, Inc. is a member of PartnersFinancial, an affiliate of NFPSI.Antolino & Associates, Inc. and NFPSI are not affiliated.

Registered Representatives of NFPSI and Investment Advisor Representatives AA Financial Advisors, LLC may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed. Not all of the products and services referenced on this site are available in every state and through every representative or advisor listed. For additional information, please contact the NFPSI Compliance Department at 512-697-6000.

PLEASE NOTE: The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. NFP Securities, Inc. makes no representation as to the completeness or accuracy of information provided at these web sites. Nor is NFP Securities, Inc. liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.