What is the tax treatment of interest earned on a traditional IRA?

The tax treatment of interest earned on a traditional IRA is designed to encourage savings for retirement. Contributions to a traditional IRA may be tax-deductible, and the growth within the account—including interest, dividends, and capital gains—is tax-deferred. This means that the taxpayer does not report the interest earned on their tax return in the year it is earned, allowing the investments to grow without immediate tax consequences.

When funds are eventually withdrawn from the traditional IRA—generally during retirement—the entire amount (including any interest earned) is taxed as ordinary income. Therefore, while the interest earned is not reported in the year it accumulates, it will be taxed upon withdrawal, aligning with the retirement savings and tax-deferred growth strategy of the account.

Options that suggest the interest is fully taxable in the year it is earned or tax-exempt for all time do not accurately reflect the nature of traditional IRAs. The only time taxes are ultimately assessed on the interest and any other earnings is upon withdrawal, further reinforcing the concept of tax deferral in retirement accounts.