SIE (Securities Industry Essentials) Practice Exam

At withdrawal, pre-tax contributions and earnings in a traditional IRA are:

1. Not taxed

2. Taxed at a reduced rate

3. Taxed at the capital gains rate

4. Taxed at the investor's ordinary income rate

The correct answer is: Taxed at the investor's ordinary income rate

Withdrawals from a traditional IRA are taxed at the investor's ordinary income rate. This is because contributions to a traditional IRA are made with pre-tax dollars, and therefore are not taxed when they are initially contributed. However, when the funds are withdrawn during retirement, they are treated as taxable income at the investor's ordinary income tax rate. This is different from Roth IRAs, which are funded with after-tax dollars and thus have tax-free withdrawals in retirement. Options A, B, and C are incorrect because they do not take into account the fact that traditional IRA withdrawals are taxed as ordinary income.