Does IRA Interest Have to Be Claimed on Year-End Income Tax?
Original post by Matt Olberding of Demand Media
An individual retirement account (IRA) offers a tax-advantaged way to save for retirement. With a traditional IRA, you get to defer taxes on the money you save and invest until you take it out in retirement. With a Roth IRA, you pay taxes up front on the money you invest, but then it grows tax-free. With either IRA, your money is not taxed as long as it remains in the account, and you don't have to report any interest or other earnings on your yearly income tax return unless you take it out.
When you invest in a traditional IRA, you get to deduct your contributions up to $5,000 per year if you are under 50 or $6,000 per year if you are 50 or older. Any taxes on the money you have contributed and any earnings on investments, including interest earnings, are deferred until you take money out of the account. Any time you withdraw money from your IRA, you must report it on your income tax return and it is taxed at your ordinary income tax rate.
With a Roth IRA, you do not receive a tax deduction for your contributions, but you also don't have to pay any tax on the earnings in your account, as long as you don't withdraw those earnings until you turn 59.5. That means that if you contribute $100,000 over the life of a Roth IRA and it grows to $600,000, you don't pay taxes on the $500,000 in earnings. Even though you don't pay taxes on the interest and other earnings, you still have to report it to the IRS when you withdraw it.
If you take money out of your IRA before you reach age 59.5, you may have to pay both regular income taxes and an additional 10-percent tax penalty. With a traditional IRA, any money you take out is taxable, and you will have to pay the additional 10 percent unless you are using the money for a qualified purpose, such as a first-time home purchase. With a Roth IRA, you can withdraw the money you have contributed at any time tax-free, but to be able to withdraw interest and other earnings tax-free, you must be at least 59.5 and have had the account for at least five years. Otherwise, you will pay taxes on the earnings plus the 10-percent penalty tax, unless the withdrawal is for a qualified purpose.
When you take more than $10 in distributions from your IRA, your account administrator will send you a Form 1099-R. You report the information from this form on your income tax Form 1040 or 1040A. If the distributions are not taxable, such as those from a Roth IRA or nondeductible contributions to a traditional IRA, you must also complete Form 8606.
About the Author
Matt Olberding has been a professional journalist for nearly 15 years at newspapers in Nebraska, Minnesota and Florida. He is currently a full-time business reporter and editor at a mid-sized daily newspaper and also has his own business-related blog. He is both a copy editor and writer for Demand Studios.
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