Do You Pay Taxes on IRA After Retirement?

Yes, withdrawals from an Individual Retirement Account (IRA) are taxed as ordinary income. Any premature distributions funded with pretax dollars also incur an additional 10% penalty tax charge.

As your retirement nears, it may make sense to reassess how your investments are distributed. Speak with both a financial advisor and tax professional regarding ways you can reduce tax as you make withdrawals from various types of assets.

Traditional IRAs

Traditional IRAs allow you to deduct savings contributions each year to reduce taxable income and thus your tax burden, but when withdrawing funds in retirement they’ll incur ordinary income tax on earnings from investments.

Your IRA allows you to invest in various assets, such as stocks, mutual funds and exchange-traded funds (ETFs), bonds and real estate. Schwab provides tools, education and assistance as well as planning calculators to make finding the ideal mix for you easy.

Individuals with earned income can contribute up to the annual contribution limit ($6,000 for 2022; $7,500 in 2023). Working spouses may also qualify to open a spousal IRA. If you need access your money prior to age 59 1/2, take “substantially equal periodic payments” over five years or until reaching age 59 1/2; otherwise the 10% early-withdrawal penalty applies; you may be able to avoid it through “substantially equal periodic payments”.

Rollovers

Rollover is an efficient way of moving funds between different retirement account types without incurring taxes. For example, your distribution from a work-sponsored retirement plan like 401(k) or 403(b) into an IRA could qualify. But to avoid tax consequences and meet compliance deadlines for depositing, including withholding payments in your new retirement account within 60 days, deposit all the distribution money into its new location before its due date is reached.

Direct rollover is another option that may suit you better; your current provider sends the distribution directly to your new retirement plan or IRA without you needing to pay taxes; instead, the IRS considers this contribution tax-deferred account and doesn’t expect you to pay.

Note that it’s essential to complete only one rollover per year, even if transferring money from multiple accounts of equal amount. This is due to only being allowed to directly rollover between two IRAs that belong to the same person.


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