How IRAs Are Taxed — And How to Pay Less
Understand the rules. Use them to your advantage.
What This Means
How Are Traditional and Roth IRAs Taxed?
Traditional and Roth IRAs offer different tax benefits, and understanding when those taxes apply can help you make better financial planning decisions.
With a Traditional IRA, contributions may be tax-deductible, investments generally grow tax-deferred, and withdrawals are typically taxed as ordinary income. Roth IRA contributions are made with after-tax money, but qualified withdrawals can be completely tax-free.
While the money is invested, both accounts allow you to buy and sell investments without triggering capital gains taxes inside the IRA.
The biggest difference is when the money goes in and when it comes out.
Traditional IRA: Potential tax break today. Taxes generally paid later.
Roth IRA: No tax break today. Qualified withdrawals tax-free later.
But choosing between the two is only part of the planning.
Roth conversions, withdrawal strategies, and the timing of income can all affect how much you pay in taxes over your lifetime.
For example, someone who retires before Social Security begins may have an opportunity to convert some Traditional IRA money to a Roth during lower-income years. Someone else may benefit from having both Traditional and Roth accounts so they have more flexibility when withdrawing money in retirement.
The goal isn’t necessarily to pay the least amount of taxes this year.
It’s to build a strategy that helps manage taxes over your lifetime while supporting your actual financial goals.
And sometimes, the strategy that looks perfect on a spreadsheet isn’t necessarily the strategy that’s perfect for the person.
At PureVest, we believe the best financial plan is one that considers the numbers, your goals, your comfort level, and your ability to stick with it.
Because understanding the rules is one thing.
Using them to your advantage is what matters.
Common Questions
What is a Roth conversion?
A Roth conversion moves money from a Traditional IRA into a Roth IRA. You generally pay income taxes on the amount converted, but future qualified withdrawals can be tax-free. It’s moving pre-tax money to after tax.
Can I have both a Traditional IRA and a Roth IRA?
Yes. You can own both types of IRAs. Having both can provide more flexibility when deciding where to take money from in retirement. However, the annual contribution limit applies to your combined contributions to both accounts—not separately to each.
How are required minimum distributions (RMDs) calculated?
RMDs are generally calculated by dividing your IRA’s account value on December 31 of the previous year by a life expectancy factor from the IRS tables. The amount you must withdraw changes each year based on your account value and age.
Will I pay taxes if I combine multiple IRAs?
You can combine IRAs of the same type, such as Traditional IRAs with Traditional IRAs or Roth IRAs with Roth IRAs, without triggering taxes when the money is transferred properly.
Remember This:
The goal isn’t to pay the least taxes today. It’s to make the best decisions for your lifetime.
Keep Learning:
Taxable Accounts & Taxes: Learn how capital gains, dividends, and interest are taxed in a regular taxable investment account—and how those rules differ from the tax treatment of IRAs.