The way in which IRA withdrawals are taxed depends on the type of IRA. In a Roth IRA. there is no tax due at withdrawal on either contributions or earnings, provided you meet certain requirements: the account must have been active for at least five years, and either the funds are used for a qualified home purchase or the account holder is 59.5 or older.
In a traditional IRA, any pre-tax contributions and all earnings are taxed at the time of withdrawal. The withdrawals are taxed as regular income, and the tax rate is based on your income in the year of the withdrawal. Although taxes are assessed at the time of withdrawal, there are no additional penalties, provided that the funds are used for a qualified purpose or that the account holder is 59.5 or older. With a traditional IRA, qualified purposes for fund withdrawal
include a qualified home purchase, qualified higher education expenses, qualified major medical expenses and certain long-term unemployment expenses.
As withdrawals from Roth IRA accounts are not taxed, Roth IRA contributions are not tax deductible. However, only individuals with a modified adjusted gross income (MAGI) of $112,000 or less are eligible to maximize the annual contribution limit. In 2014, the annual contribution limit was $5,500 for any type of IRA account. Only individuals with a MAGI of up to $127,000 are eligible for a partial contribution to a Roth IRA, with the rest of the funds placed in a traditional IRA.
Traditional IRA contributions can be tax deductible or partially tax deductible based on MAGI. In 2014, an individual with a MAGI of up to $70,000 is eligible for at least partial deductibility. There are no income limits on who can contribute to a traditional IRA.