There are various types of IRAs, with the most common being Traditional IRA or Roth IRA. In the former category, any contributions made are tax exempted i.e. there will be no tax impact on the IRA earnings. However, whenever the money is distributed, it will be considered as taxable income. The latter category works the opposite way where contributions will be taxed but there will be no tax impact when the money is withdrawn.
Other forms of IRA stem from the above two categories where an employer provides retirement plans such as SEP IRA.
As mentioned earlier, any withdrawals or distributions will be taxed, depending on when the money is taken out. Under the required minimum distribution (RMD), a person must withdraw the savings before April 1 of the year when they have turned 70 ½. There could be a 50 percent tax penalty if you have still kept the money in the account. The distribution system will be based on your life expectancy and whether the beneficiary has a spouse. Also one cannot contribute to the traditional IRA account, once he or she reaches over 70.
Moreover, there will be penalties if you withdraw the money before you reach the age of 59 ½. If that is the case, you will incur 10 percent tax on the money distributed. However, there are certain exceptions to this rule, depending on your health condition, educational expenses, disability or death.
In order to limit paying too much tax on your distribution, people must contribute a larger portion of their income into the retirement account, which will in turn put them in a low income bracket. Consequently, when the time arrives to withdraw money, the IRS distributions will be greater due to the fact that a person was placed in a low tax bracket.