“Are my retirement savings taxed?” is a question many retirement account holders ask. Usually, your retirement savings are not taxed until you retire and start taking distributions. In fact, to encourage people to save for their retirement, the government allows a tax deduction for contributions to IRAs and other retirement accounts. However, after you turn 59 ½, withdrawals from retirement accounts are taxed on the basis of the tax bracket under which you fall.
The money you contribute to your retirement plan is expected to be withdrawn after you retire. If you face a financial emergency and make a withdrawal from your retirement account, you pay an additional 10% tax on the amount withdrawn. However, there are exceptions. For example, if you are using the premature distributions to purchase a first home (up to $10,000) or for certain medical or educational expenses, then you may not be required to pay the additional 10% tax. You are also exempted if you are totally and permanently disabled. Premature distributions need to be reported to the IRS.
Rollovers from one IRA to another are not subject to the additional 10% tax, but the amount you rollover is generally taxed when you or your beneficiary receive a distribution from your new plan.
If you made nondeductible contributions to a Roth account and you make early withdrawal, then the part of the distribution attributable to the nondeductible contributions is not taxed. However, it may be subject to penalties.
For detailed information on taxes and retirement distributions, use IRS Publication 575, Pension and Annuity Income, and Publication 590, Individual Retirement Accounts (IRAs) available on the IRS website – irs.gov.