Registered Tax Return Preparer RTRP Practice Exam

Withdrawals from traditional retirement accounts, such as traditional IRAs and 401(k)s, are taxed as ordinary income in the year they are taken. This means that the amount withdrawn is added to the taxpayer's taxable income and taxed based on their ordinary income tax rates.

The reason for this taxation method lies in the nature of traditional retirement accounts, which typically involve contributions made with pre-tax dollars. This allows for tax deferral until the funds are withdrawn during retirement. Since these contributions have not been taxed at the time of deposit, the IRS requires that taxes be paid on the full amount of withdrawals when taking distributions.

As a result, option C accurately reflects the tax treatment of withdrawals, aligning with tax laws governing traditional retirement accounts. The other options do not apply: withdrawals are not taxed at a flat rate, treated as capital gains, or subjected to a special retirement tax rate. All of these alternatives misrepresent how the IRS treats these distributions.