How Are IRA Distributions Taxed?

Many IRA distributions are taxed but some are not

Man meeting with financial advisor at home about retirement planning

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When you take money out of an individual retirement account (IRA), you may have to pay taxes on the withdrawal, depending on the type of IRA. With a traditional IRA, you will owe taxes on distributions (a distribution is generally considered a withdrawal you make for retirement income). But with a Roth IRA, you won't owe taxes as long as you meet certain requirements.

Key Takeaways

  • When you withdraw from a traditional IRA, your money will be taxed, but qualified Roth IRA distributions are not taxed.
  • You can be hit with a 10% tax penalty if you take a distribution from either type before the age of 59 1/2, and if you take a distribution from a Roth that you've had for less than five years.
  • There are exceptions to the penalties that include using an early withdrawal for a qualified medical or higher education expense, or for a first home.
  • The IRS has a one-year rule that states that you typically cannot make more than one rollover within a one-year period.

Traditional IRA vs. Roth IRA

The two main types of IRA offerings are taxed differently.

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. Distributions from a traditional IRA are typically considered taxable income because of those tax deductions you took when you made the contributions.

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, as long as you've had a Roth for at least five years.  

How Distributions From Traditional IRAs Are Taxed

In general, distributions from a traditional IRA are taxable in the year you receive them. They're treated as ordinary income, taxable at your marginal tax rate.


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. 

In terms of tax planning, the rationale for investing in a traditional IRA is that you're in a higher tax bracket when you're working than you will be later in life living off of retirement income. So it's better to put off taxes until you're ready to use the money when you're retired and your tax rate is lower.

Exceptions to Early-Withdrawal Penalties for Traditional IRAs

You will have to pay taxes on any withdrawals from your IRA. But there are certain situations in which you may be exempt from paying the early-withdrawal penalty. Qualified purposes for an early withdrawal from a traditional IRA include:

  • First-time home purchase (up to $10,000 allowed) 
  • Qualified higher education expenses
  • Qualified major medical expenses
  • Health insurance premiums paid while you're unemployed
  • Total and permanent disability.

The One-a-Year Rule for IRA Rollovers

But what if you move the funds from one IRA to another? This is known as a "rollover," not a distribution. There is a one-year rule that generally applies to IRA rollovers. The rule states that you typically cannot make more than one rollover within any one-year period, nor can you make a rollover during this one-year period from the target IRA to which the distribution was rolled over.

The rule just applies to so-called "indirect" or "60-day" rollovers in which you withdraw funds from one IRA and move them to another within 60 days. It doesn't apply to trustee-to-trustee transfers between IRAs, or transfers from plan administrator to plan administrator where you have no access to funds. This type of transfer is not considered a rollover. The rule also doesn't apply to Roth IRA conversions.

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 from one account to another without your involvement, no taxes come due, no matter how many you do in a year. 

Other Distributions That Qualify for Tax-Exempt Treatment

Distributions can be exempt from taxation in some other situations as well, meaning 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 is made.
  • You can make a one-time distribution of money from your IRA to a health savings account (HSA).

How Roth IRA Distributions Are Taxed

The contributions you make to a Roth IRA—your principal—can be withdrawn at any time tax-free because you already paid income taxes on the money you contributed. But the earnings are subject to more withdrawal rules.

You can withdraw earnings without taxes or penalties as long as you're at least 59 1/2 years old and have had a Roth IRA account for at least five years. But if you're not at a qualifying age or you haven't had the account for at least five years, you're subject to a 10% penalty on your withdrawal.

Exceptions to Early-Withdrawal Penalties for Roth IRAs

As with a traditional IRA, you're exempt from early withdrawal penalties if you're in one of these situations:

  • You're disabled
  • You're a beneficiary inheriting a Roth IRA
  • You're using the withdrawal to buy or rebuild a first home (up to $10,000 allowed in your lifetime)
  • You're using the withdrawal for a qualified medical or higher education expense.

Frequently Asked Questions (FAQs)

Can you withdraw from an IRA?

You can withdraw from a traditional IRA if you are at least age 59½, but the amount will be subject to ordinary income tax. If you're younger, you'll also have to pay a 10% additional tax penalty.

You can withdraw contributions from a Roth IRA free of taxes and penalties at any time. But if you withdraw earnings, you'll be slapped with a 10% penalty if you aren't 59 1/2 or you haven't had the account for at least five years.

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.

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