If you receive Individual Retirement Account (IRA) distributions, you may have fully or partially taxable income depending on the type of IRA and whether your contributions to the IRA were in before-tax or after-tax dollars.
The new tax law generally didn’t change the taxability of IRA distributions, but added a new disaster tax relief provision. See Notes below.
If you receive IRA distributions, you may have fully or partially taxable income depending on the type of IRA and whether your contributions to the IRA were in before-tax or after-tax dollars. IRA distributions include distributions from traditional IRAs, Roth IRAs, Savings Incentive Match Plan for Employees (SIMPLE) IRAs and Simplified Employee Pension (SEP) IRAs.
There are two basic types of IRAs:
- Traditional IRA; and
- Roth IRA.
The taxation differs for these two types of IRAs.
- Traditional IRA contributions may be tax-deductible for the year you make the contribution; withdrawals in retirement of before-tax contributions and earnings are taxed at ordinary income tax rates.
- Roth IRA contributions are made with after-tax dollars; withdrawals in retirement of contributions and earnings are generally tax-free. However, contributions are subject to income limitations.
For more information, see IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).
The new tax law generally didn’t change the taxability of IRA contributions and distributions.
Note: The new tax law gave tax relief to taxpayers affected by federally declared disasters that occurred in 2016. Eligible taxpayers are exempt from the 10 percent additional tax imposed for early IRA withdrawals and can include disaster distributions in gross income over three years. See IRS Publication 976, Disaster Relief.
Note: The new tax law eliminated the rule permitting recharacterization of conversion contributions from traditional IRAs to Roth IRAs and of rollovers from other types of plans to Roth IRAs. Other recharacterizations are still permitted.
How will this affect me?
Before he retired, Austin made only before-tax contributions to his traditional IRA. After he retired at age 65, Austin received a $10,000 IRA distribution during the year. Austin should include the entire amount of his IRA distribution as taxable income on his tax return.
Before he retired, Austin made after-tax contributions to his Roth IRA for more than five years. After he retired at age 65, Austin received a $10,000 Roth IRA distribution during the year. The Roth IRA distribution isn’t taxable to Austin.