Individual retirement accounts (IRAs) are given special tax status by the Internal Revenue Service to encourage Americans to save for their retirement. These accounts are tax-sheltered, which means as long as the money remains in the account, you do not have to pay taxes on the accrued earnings. You may earn interest if you invested your money in an IRA certificate of deposit or money market account. You don't have to report any of that interest while the money remains in your IRA. However, once you begin making withdrawals, whether you have to pay taxes on your IRA interest will depend on whether you have a Traditional IRA or Roth IRA.
Video of the Day
If you have a Traditional IRA, you do not have to report interest earned on your IRA in the year that you earn it. However, you do have to report the distributions from your IRA when you retire as taxable income. You are allowed to start taking distributions penalty-free from your IRA at age 59 1/2 and you are required to start taking distributions from a traditional IRA in the year you turn 70 1/2. The required minimum distribution amount depends on the size of your traditional IRA and your expected distribution period, as determined by the IRS life expectancy tables. When you take the distributions, you must report the income on line 15a and 15b of your Form 1040 tax return.
Roth IRAs differ from traditional IRAs in that you do not receive a tax deduction when you initially contribute to the account. The benefit of Roth IRAs is that the money you contribute, as well as all interest and other earnings such as dividends can be withdrawn tax-free at retirement. This means that you never have to claim interest earned on your Roth IRA. It is also important to note that there are no required minimum distributions from Roth IRAs.