Under a Traditional IRA, interest earned is taxed

• A. Upon distribution
• B. Annually as earned
• C. When contributed
• D. Upon withdrawal of principal

Answer: (A)

The growth inside a Traditional IRA is tax-deferred, so you don’t pay taxes on the interest or earnings each year. The tax on those earnings isn’t due until you take money out in a distribution, and that money is taxed as ordinary income at that time. That’s why interest earned is taxed upon distribution.

If you contributed amounts that were deductible when you put them in, those amounts are taxed when you withdraw along with the earnings. If you made nondeductible contributions, you’ve already paid tax on those contributions, so only the earnings (and any deductible portion) are taxed during withdrawal.