this is How Traditional IRA Withdrawals Are Taxed​

With a traditional IRA, any pre-tax contributions and all earnings are taxed at the time of withdrawal. The withdrawals are taxed as regular income (not capital gains), and the tax rate is based on your income in the year of the withdrawal.1​

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The idea is that you are subject to a higher marginal income tax rate while you are working and earning more money than when you have stopped working and are living off of retirement income—although this is not always the case.​

​Traditional IRA holders (and 401(k) plan participants, too) who are 72 years and older must withdraw minimum amounts, called required minimum distributions (RMDs), which are subject to taxation. RMDs used to start at 70½, but the age was lifted following the December 2019 passage of the Setting Every Community Up For Retirement Enhancement (SECURE) Act.​

Although taxes are assessed at the time of withdrawal,

there are no additional penalties, provided that the funds are used for a qualified purpose or that the

account holder is 59½ years of age or older. With a traditional IRA, qualified purposes for an early

withdrawal include a first-time home purchase, qualified higher education expenses, qualified major

medical expenses, certain long-term unemployment expenses, or if you have a permanent disability.3​

​Traditional IRA contributions can be tax-deductible or partially tax-deductible based on your modified

adjusted gross income (MAGI) if you contribute to an employer-sponsored plan, such as a 401(k).​

​In 2020, an individual with a MAGI between 65,000 and $75,000 is eligible for at least partial deductibility,

as is a married couple filing jointly with a MAGI of between $104,000 and $124,000. For 2021, the MAGI

for individuals is $66,000 to $76,000, and for married couples filing jointly it’s $105,000 to $125,000.

2 There are no income limits on who can contribute to a traditional IRA.1​

How Roth IRA Contributions Are Taxed (or Not)​

Because contributions to Roth IRAs are made with after-tax dollars, you can withdraw them tax-free at any time, for any reason. But this also means they are not tax-deductible as contributions to a traditional IRA can be.1​

​You can withdraw earnings without penalties or taxes as long as you’re 59½ or older and you have had a

Roth IRA account for at least five years.4 Although it can be hard to predict, if you think you will be in a

high tax bracket when you retire, a Roth IRA may be a good choice.​

You can only contribute earned income to a Roth IRA.​

Like a traditional IRA, you can avoid the 10% penalty for withdrawals if the money is used for a first-time

home purchase, qualified education expenses, medical expenses, or if you have a permanent disability.

You’ll still pay taxes on the amount withdrawn, though.4​

Not everyone is eligible to contribute to a Roth IRA.

Unlike a traditional IRA, there are income limits. In 2021, only individuals with a modified adjusted gross income (MAGI) of $140,000 ($139,000 for 2020) or less are eligible to participate in a Roth IRA. The phase-out for singles starts at $125,000 ($124,000 for 2020). For those married filing jointly, the 2021 MAGI limit is $208,000 ($206,000 for 2020), with a phase-out starting at $198,000 ($196,000 for 2020).2 If you earn too much to contribute to a Roth directly, you might be able to make contributions indirectly via a strategy known​.