I'm planning to move money from my savings account to a new IRA account, but I don't understand why I'll be charged penalties for withdrawing the money.

Why do I have to pay extra taxes to take my money out of a retirement account as a opposed to my savings account?

Why shouldn't I just keep my money in the savings account and earn the same amount (both accounts have the same APY in this case)?

  • 1
    Are you asking about taxes or penalties? Is your savings account a regular account or an IRA? Why do you think you're paying taxes on it?
    – littleadv
    Apr 1, 2013 at 8:07
  • @littleadv He's asking about the taxes/penalty if he were to make eventual withdrawals from the IRA (the account he's moving to) Apr 1, 2013 at 12:45
  • @littleadv ChrisW.Rea has it right. My savings account is a money market account, not an IRA. I'll have to pay taxes to withdraw my money from an IRA. Apr 1, 2013 at 16:25

1 Answer 1


Why shouldn't I just keep my money in the savings account and earn the same amount (both accounts have the same APY in this case)?

I will assume that you are transferring money from your savings account into a Traditional IRA and deducting the contribution from your income. While you may think that the money that is being transferred is yours already -- it is sitting in your savings account, for Pete's sake! -- you are deducting that amount in getting to your taxable income, and so you are effectively contributing it from current income and not paying taxes on the amount contributed.

So, consider the same amount of money sitting in your savings account versus the same amount of money sitting in your Traditional IRA account. While you will earn the same amount of interest in both accounts, you will have to pay taxes each year on the interest earned in the savings account. You might choose, as most people do, to not take money out of the savings account to pay theses taxes but just pay them from ready cash/checking account/current income etc., or these taxes might just reduce the refund that you will getting from the IRS and your State income tax authority, but in either case, you have paid taxes on the interest earned in your non-IRA savings account, and of course, long ago, you also paid taxes on the original amount in the non-IRA savings account. So, if you take any money out of the non-IRA savings account, you don't pay any taxes on the amount withdrawn except possibly for the interest earned from January 1 till the date of withdrawal (which you are paying from ready cash). On the other hand, consider the Traditional IRA. The original deposit was not taxed in the sense that you got a deduction (reduced tax or increased refund) when you made the contribution. The annual interest earned was not taxed each year either. So when you make a qualified withdrawal (after age 59.5 or by meeting one of the other exceptions allowing withdrawal before age 59.5), you are taking money on which you have not paid any taxes at all, and the IRS wants its cut. The money withdrawn is taxable income to you. Furthermore, the money withdrawn is not eligible for any kind of favorable treatment such as having it count as qualified dividends or as long-term capital gains even if your IRA was invested in stocks and the money in the account is all qualified dividends or long-term capital gains. If you make an unqualified withdrawal, you owe a penalty (technically named an excise tax) in addition to income tax on the amount withdrawn.

If you are investing in a Roth IRA, you will not be getting a deduction when you make the contribution, and qualified withdrawals are completely tax-free, and so the answer is completely different from the above.

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    Ah, I think I've got it. Basically, I'm not paying income taxes on the contribution to the retirement account. It essentially is not considered income for that year. When I withdraw it from the retirement account, that's when the taxes will come out that should've come out when I actually earned the income, if I hadn't put it in a retirement account. Apr 1, 2013 at 16:36

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