- Tax is due on any amount you withdraw from your IRA, since the IRA normally contains tax deductible contributions. This means that none of the money has been taxed yet. So, even if you lose money in your account, you must still pay tax on your IRA when you cash it in. Because you cash it in at age 60, you avoid the 10 percent penalty normally due on an early IRA distribution.
- Roth IRAs are not subject to taxation when you cash in the account after you reach the age of 59 1/2. This means that the IRA is tax-free. The age you cash in your IRA does matter, however. By cashing in your Roth IRA at age 60, you avoid paying tax on the investment gain in the account. Additionally, you avoid paying a penalty on your investment gains.
- The investments inside your IRA would be subject to capital gains tax if you had sold them outside of your account. However, the IRA eliminates this tax. Instead, the tax rate you pay is based on ordinary income tax rates. All money received from your IRA when you cash it in is considered investment income and is taxed at ordinary income tax rates.
- Traditional IRAs are not taxed when you make non-deductible contributions to the IRA and you claim a loss on the account. Normally, contributions to IRAs are deducted from your income. However, when you cash in your IRA at age 60 and you have non-deductible contributions in your account, these contributions are not taxed. Additionally, if you have less money in your account than what you contributed, you won't pay tax on the money in the account.
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