Distributions From Individual Retirement Accounts and Exceptions

Many IRA distributions are taxed but some are not

Man meeting with financial advisor at home about retirement planning
Photo:

The Good Brigade / Getty Images

An individual retirement account, commonly called an IRA, is a retirement plan provided by many financial institutions. These accounts offer some significant tax advantages for retirement savings, but they're not all the same. Different types of IRAs include traditional, Roth, SEP, and SIMPLE plans, and the rules can be marginally different for each. 

Key Takeaways

  • The main types of IRAs include traditional, Roth, SIMPLE, and SEP.
  • You can be hit with an additional 10% tax penalty if you take a distribution before the age of 59 1/2.
  • The IRS has a one-year rule which states that you typically cannot make more than one rollover from the same IRA within a one-year period.
  • Examples of IRA distributions that can be tax-exempt include a qualified charitable distribution (QCD), which is generally a tax-free distribution made directly by the trustee of your IRA (other than an ongoing SEP or SIMPLE IRA) to eligible charitable organizations.

Types of IRAs

Here are the main types of IRA offerings:

Traditional IRA: A traditional IRA is the one most people think of when they hear the term. In many cases and subject to certain limitations, you're entitled to a tax deduction for contributions you make to a traditional IRA plan.

Roth IRA: You can't claim a tax deduction for contributions you make to a Roth IRA plan, but you don't have to pay taxes on any distributions you take after retirement age, either. Distributions from a traditional IRA are typically considered taxable income because of those tax deductions you took. 

SIMPLE IRA: A savings incentive match plan for employees (SIMPLE) IRA is provided by an employer. It allows employees to make pre-tax contributions from their paychecks. For example, if you're paid $1,000 a week and you contribute $25 to your SIMPLE IRA, you would only pay taxes on $975 because that $25 is deducted before taxes are calculated on the balance. However, these distributions are taxable as well when you retire and take money out.  

SEP IRA: "SEP" IRA stands for "Simplified Employee Pension" and this type of plan is available to self-employed individuals.

The Basics About IRAs

Some general rules apply to all IRAs. Money that you take out of the account is called a distribution and distributions are included on your tax return as taxable income in most cases. They're treated as ordinary income, taxable at your marginal tax rate. In general, distributions from a traditional IRA are taxable in the year you receive them.

Note

You can be hit with an additional 10% tax penalty if you take a distribution before the age of 59 1/2. The flip side of this is that you must begin taking distributions after age 72. 

But what if you move the funds from one IRA to another? This is known as a "rollover," not a distribution. 

The One-a-Year Rule for IRA Rollovers

There is a one-year rule that generally applies to IRA rollovers. The rule states that you typically cannot make more than one rollover from the same IRA within a one-year period, nor can you make a rollover during this one-year period from the IRA to which the distribution was rolled over. But you can make unlimited trustee-to-trustee transfers between IRAs, or transfers from plan administrator to plan administrator because this type of transfer is not considered a rollover.

A rollover occurs when you get involved as the middleman, effectively taking possession of the money before transferring it to another account, even for a short period of time.

When the funds go directly from one institution to another, or one account to another without your involvement, no taxes come due. 

Some Exceptions to the Rule 

The one-year rule does not apply to the number of rollovers you can make from a traditional IRA to a Roth IRA. These transfers are known as conversions.

Note

Certain types of distributions from defined benefit plans, like those paid to airline employees, can be rolled over to traditional IRAs without tax consequences.

And if you participate in a SIMPLE IRA, you can roll funds from other group retirement plans, such as 401(k) plans and traditional IRAs, into your SIMPLE IRA two years after you first began participating in the plan. 

Other Distributions That Qualify for Tax-Exempt Treatment

Distributions can be exempt from taxation in some other situations as well—they don't have to be included in your gross income. 

  • The one rollover that you're permitted per year is not taxable in that specific year. 
  • A qualified charitable organization (QCD) is generally a tax-free distribution made directly by the trustee of your IRA (other than an ongoing SEP or SIMPLE IRA) to an organization eligible to receive tax-deductible contributions. You must be at least age 70½ when the distribution was made.
  • Distributions from Roth IRAs become tax-free if the IRA is at least five years old and you've reached age 59 1/2. You can also take Roth IRA distributions tax-free if you're younger than age 59 1/2 if you're doing so to buy a first-time home or due to disability. 
  • You can make a one-time distribution of money from your IRA to a health savings account (HSA).

Frequently Asked Questions (FAQs)

Can you withdraw from an IRA?

You can withdraw Roth IRA contributions at any time, for any reason, without paying taxes or penalties after age 59½. However, early withdrawal from an IRA prior to age 59½ is subject to being included in gross income plus a 10% additional tax penalty. 

What are the exceptions to the 10% early withdrawal penalty?

There are certain exceptions to the 10% early withdrawal penalty. These include:

  • Death: Distributions made to your beneficiary or estate on or after your death
  • Disability: Distributions made because you're totally and permanently disabled
  • Medical insurance: Distributions made to pay for health insurance if you've lost your job and are receiving unemployment benefits.
  • Unreimbursed medical expenses: Distributions to the extent you have deductible medical expenses that exceed 7.5% of your adjusted gross income whether or not you itemize your deductions for the year.
  • Reservists: Distributions that are qualified reservist distributions. Generally, these are distributions made to individuals called to active duty for at least 180 days after September 11, 2001.


Was this page helpful?
Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. "What if I withdraw money from my IRA?"

  2. IRS. "Retirement Plan and IRA Required Minimum Distributions FAQs."

  3. IRS. "Rollovers of Retirement Plan and IRA Distributions."

  4. IRS. "Publication 590-B (2020), Distributions from Individual Retirement Arrangements (IRAs)."

  5. H&R Block. "Traditional & Roth IRAs: Withdrawal Rules and Early Withdrawal Penalties."

  6. IRS. "Topic No. 558 Additional Tax on Early Distributions from Retirement Plans Other than IRAs."

Related Articles