What is the effect on Joan's taxes when withdrawing from her deductible retirement account?

When withdrawing from a deductible retirement account, the entire amount is generally taxable as ordinary income. This is because contributions to deductible retirement accounts, such as traditional IRAs or 401(k)s, are made with pre-tax dollars. As a result, taxes are deferred until the funds are withdrawn.

When Joan withdraws from her deductible retirement account, the IRS treats the distribution as income, and she is required to pay income tax on the full amount of the withdrawal at her current income tax rate. This principle applies regardless of the amount she withdraws or her age at the time of the withdrawal, which is different from rules governing Roth IRAs or specific exceptions for certain types of accounts.

Understanding this principle is vital for individuals to plan their withdrawals and tax liabilities appropriately. The tax implications can notably affect their overall financial strategy during retirement.