- For tax purposes, the Internal Revenue Service uses the last-in, first-out rule for taxing distributions. This means partial withdrawals must be made up entirely of interest (gain – if there is any) and are reported as interest income. Thereafter, contributions may be withdrawn and are not reported as income, since this is the original investment. Withdrawals prior to age 59 1/2 are subject to a 10 percent federal tax penalty, with a few exceptions.
- A qualified annuity is subject to IRA rules or regulations, but these may offer increased income tax advantages, which over time can be an effective financial planning tool for younger investors.
- Individual IRA contributions are made from pre-tax earned income and may, under specific income conditions, allow tax deferment on the contribution, reducing the current tax liability. A spouse without earned income may contribute to a Spousal Traditional IRA, as long as one spouse has earned income. However, contribution and income limitations on Traditional IRAs apply.
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