Under a Traditional IRA, when is the interest earned taxed?

The correct answer is that under a Traditional IRA, the interest earned is taxed upon distribution. This means that any gains you make within the IRA, such as interest, dividends, and capital gains, are not taxed in the year they are earned. Instead, they are tax-deferred, meaning you do not pay taxes on these earnings until you withdraw the money from your IRA.

This tax-deferred status is one of the primary benefits of a Traditional IRA, as it allows individuals to grow their retirement savings without the immediate tax burden. When withdrawals are made, usually during retirement when individuals may be in a lower tax bracket, the distributions are then subject to income tax.

The other choices do not align with how Traditional IRAs are structured. Contributions are made with pre-tax dollars, meaning you receive a tax deduction at the time of contribution, thus not taxed at that point. Hence, it's incorrect to say the interest is taxed upon contribution or never taxed. Furthermore, while the withdrawal might suggest the tax is applied "at the time of withdrawal," this phrasing could be misleading since taxes are calculated based on the income received from those withdrawals during the distribution phase, aligning with the concept of taxation upon distribution.