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 As a result, taxes are not payable until funds are withdrawn, generally in retirement.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 account has been held for at least five years) 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 Failure to take RMDs triggers a 50% federal income tax penalty on the amount that should have been withdrawn.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 IRAs are exempt from 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.   This material was written and prepared by Emerald. © 2010 Emerald

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