Financial Industry Regulatory Authority (FINRA) Practice Exam 2025 - Free FINRA Practice Questions and Study Guide

Distributions from traditional IRAs are subject to taxation at ordinary income tax rates. This means that when you withdraw funds from a traditional IRA, the amount you take out is added to your taxable income for the year and taxed according to your income tax bracket.

Traditional IRAs allow for tax-deferred growth, meaning that contributions made to the account may have been made with pre-tax dollars, providing immediate tax benefits. Consequently, when you eventually take distributions, that money is taxed as ordinary income rather than at capital gains rates, which apply to gains on investments held outside of retirement accounts.

This taxation approach encourages individuals to save for retirement, as it allows them to defer tax payments until they access the funds, typically during retirement when they may be in a lower income bracket. Capital gains rates apply specifically to profits from the sale of assets like stocks or property, while corporate tax rates pertain to the earnings of corporations, making those options incorrect in this context. Additionally, the taxation applies at both federal and potentially state levels, but since the question focuses on the rate, only the ordinary income tax rate applies here.